What is the Difference Between Call and Put 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.
• 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.

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.

The differences between call and put option can be found in the table below:

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

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.