Investors have different options to invest their money in stock markets. One of them is the options category of securities in which they trade their securities at agreed date and price.
Options are sub divided into the following −
In this option buyer has the right to buy assets at strike price at a particular date. To acquire call option investors have to pay some upfront cost call premium through which they can get the right to purchase a product at a fixed price on a particular date. Stocks, currencies, bonds etc. covered in call options.
Let’s say, a buyer and seller comes to an agreement to purchase 1500 shares at Rs.100 per share of X company after 4 months and pays the premium of Rs.7000/-. After 4 months the share prices go to 120 then buyer can buy shares from seller at 100 per share by exercising his/her right and seller has to pay the same.
Similarly if the price goes to Rs.80/- then the buyer will not buy from the seller and he may go to another seller and buy the same.
In this option buyer sells his/her asset at strike price on a particular date. A paying premium buyer acquires the right to sell his/her asset at strike price on a particular date. The seller has no other choice than buying the asset from the buyer at strike price.
Let say, buyer and seller enter the contract and buyer sells 500 shares of Rs.100 per share of Y company after 2 months. Buyer pays a premium amount of Rs.6000/- for that. In 2 months price comes down to Rs.90/-.
Now the buyer will purchase Y company shares at Rs.90/- and sell to the seller at Rs.100/-. Similarly, if the price of share goes to Rs.110/-, now buyers will not buy because it leads to loss.
The major differences between call option and put option are as follows −
|Sr.No||Call option||Put option|
|1||Buying of underlying assets on a specific date at pre determined price.||Selling of underlying assets at a specific date at pre decided price.|
|2||Investors expect prices to rise.||Investors expect a fall in price.|
|3||Unlimited gains.||Limited gains.|
|4||Permits only buying of stock.||Permits only selling of stocks.|
|5||Considered as a security deposit for taking a product at a fixed price.||Like an insurance against loss in value.|
Put and call options are opposite terms. If investors want to go for a call option he/she wants the price to go up so that they can earn profits and if investors want to go for put options he/she wants the price to go down to avoid loss for paid premium.