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Key Highlights
- A call option is a financial contract that gives you the right to buy an underlying asset at a particular price within a stipulated timespan.
- A put option is the opposite of a call option. It is the right given to you, as a trader, to sell an underlying asset or financial contract at a fixed price on a future date.
- When you invest in a call option, you will anticipate a rise in the share price. If you opt for a put option, you will expect the prices to fall to earn profits.
Call and Put Option Meaning
Before we check out the differences between call and put option , we must learn their meaning to develop a clearer understanding. Let's get started.
What is a Call Option?
A call option is a financial contract that gives you the right to buy an underlying asset at a particular price within a stipulated timespan. These assets could be stock, bonds, or commodities.You are not necessarily obligated to buy a pre-decided quantity of the underlying asset at a certain expiration date for a certain price. You can invest in a call option with the expectation of the security's price to rise in order to reap high profits.
What is a Put Option?
Now, let us understand the meaning of a put option. A put option is the opposite of a call option. It is the right given to you, as a trader, to sell an underlying asset or financial contract at a fixed price on a future date.The put option lets you sell the security; however, you are not obligated to do so. It is important to note that you will be able to make profits with a put option only when the value of the underlying asset falls.
Difference Between Call and Put Option
The differences between call and put option can be found in the table below:
| Call Option | Put Option | |
| Meaning | A call option is the right to buy an underlying asset or contract at a fixed price on a given date. | A put option is the right to sell an underlying asset or contract at a fixed price on a future date. |
| Potential Gain | The potential gain in a call option can be unlimited. | You can reap only limited profits with a put option. |
| Profitability | A call option will generate profits only when the value of the underlying asset rises. | With a put option, you can make profits only when the value of the underlying asset falls. |
| Expectations | With a call option, you always expect the price of a security to rise. | In a put option, your expectation as a trader is for the stock price to fall. |
Call and Put Options Examples
To understand how you can exercise a call and put option, let us check out a call and put options example below:Let's assume the stock price of company A is ₹100 for each share. An investor, Mr. X, holds 100 shares of the said company and aims to reap high profits from the regular stock movements.As per reports and expert analysis, the stock of the company is seen rising not more than ₹110 until the next month. Mr. X will then assess call options and discover that a call option of ₹110 exists at ₹0.60 per contract.Mr. X then sells one call option to the buyer and receives ₹60 as a premium (₹0.60 X 100 shares).If the price of the stock rises beyond ₹110, Mr. X will have to deliver the shares at ₹110 per share. However, if the price does not increase beyond ₹110, Mr. X will continue to hold on to the shares. Also Read: Best Option Trading Strategies You Should Know
Call Options vs Put Options - Which is Better?
When you invest in a call option, you will anticipate a rise in the share price. On the other hand, if you opt for a put option, you will expect the prices to fall to earn profits.Meanwhile, both call option and put option act as a financial contract between a buyer and a seller, providing the rights to buy and sell the underlying security. The losses in both cases are limited to the amount paid as a premium.So, irrespective of which option you choose, you must go with the one that fulfils your specific goals.
FAQS - FREQUENTLY ASKED QUESTIONS
What is meant by a call option?
A call option is a financial contract that gives you the right to buy an underlying asset, such as a stock, bond, or commodity, at a particular price within a stipulated time period.
What is meant by a put option?
A put option is the right given to you, as a trader, to sell an underlying asset or financial contract at a fixed price on a future date but at a price that is decided on the present day.
What is the difference between call and put option?
The difference between call and put option is simple. A call option is the right to buy whereas a put option is the right to sell.
What is call & put option in Nifty?
Call & put option in Nifty means the right given to a buyer to buy or sell the underlying asset at a particular price within a stipulated period of time.
What is the similarity between call and put option?
Both the call option and put option are rights given to buyers and sellers of the underlying assets, without the obligation to buy or sell. Call and put option both have a buyer and a seller.
Call options vs put options: What should I choose to make higher profits?
The potential gain in case of a call option can be unlimited whereas, in a put option, you can reap only limited profits. Overall, you must choose the option that best meets your goals.
What do investors expect for when buying call and put option?
Investors expects the price of the underlying security to rise or fall in a call and put option, respectively.
Are call and put option safe?
Yes, investing in call and put option is safe if done with due diligence.
When do I sell a call & put option in Nifty?
You sell a put option when you agree to buy a stock at the agreed price.
Can investors below the age of 18 invest in call and put option?
Yes, a minor can invest in call and put option.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
