In option trading there are different terms involved and different complexities are involved in choosing the best fit or strategy. Each term has its own advantages and limitations.
Some of the aspects to look at are the current market position, investor risk appetite, investor trading experience, profit potential, trade breakeven point, investor intentions and expectations etc.
This involves buying a put option which means choice to sell option at predetermined date at expiry time. This strategy gives buyers a put option on expiry but not obligation. Premium is paid to buy put options.
In this strategy the investor will exercise his option when prices are down. When he exercises this option when prices are up then he will encounter losses. Timing is very important in exercising these options.
Most suitable time is when the market is highly bearish and expects markets to go down sharply. This option is more suitable in neutral markets. Maximum profit is calculated by deducting the premium paid from strike price (long put).
Short call means selling a call option. At the beginning it generates net credit by receiving premium. It is also called an uncovered call or naked call.
Strategies are made based on current market conditions, so you need to be aware of market conditions. It is used by experienced traders because any inexperienced traders doing these options may lead to heavy or unlimited losses.
Strike plays an important role in the success of short call strategy. To get higher premiums, strike price must be above current price or close to current market price. In this, profits are limited.
Good time to use this strategy is when traders are quite bearish towards the market. He writes the call and receives a premium. Option is written at a predetermined price and at a higher market price.
Maximum profit earned in this strategy is equal to the premium amount received. Loss is calculated as the difference between security price and strike price minus premium received.
The major differences between long put and short call are as follows −
|Sr.No||Long put||Short call|
|1||Experts’ asset prices go down.||Asset prices go down sharply.|
|2||On expiry, traders may put an option to buy, but not obligation.||On expiry, traders have an obligation to buy.|
|3||Bearish market position.||Bearish market position.|
|4||Suitable for beginners.|
|5||Traded on put option.||Traded on call options.|
|6||Buy put option.||Sell call option.|
|7||Limited risk.||Unlimited risk.|
|8||Unlimited potential profit.||Limited potential profit.|
|9||Break even = strike price – premium.||Break even = strike price – premium.|
|10||Investors expect the price of assets will go down.||Asset price goes down sharply.|
|11||Effective strategy.||Risky strategy.|