Call & Put Explained

Call Options and Put Options Explained

Call Options and Put Options are the two main types of options contracts used in options trading. An options contract gives a trader the right, but not the obligation, to buy or sell an underlying asset at a specific price within a certain period of time. Understanding how call and put options work is essential for anyone who wants to trade in the options market.

What is a Call Option?

A Call Option gives the buyer the right, but not the obligation, to buy an underlying asset at a predetermined price, known as the strike price, before the option’s expiration date. Traders usually buy call options when they expect the price of the asset to increase in the future.

For example, suppose a company's stock is currently trading at ₹100 and a trader expects the price to rise to ₹110 before the option expires. The trader may buy a call option with a strike price of ₹110. If the stock price rises significantly above the strike price, the trader can benefit from the price difference.

What is a Put Option?

A Put Option gives the buyer the right, but not the obligation, to sell an underlying asset at a predetermined price before the option’s expiration date. Traders usually buy put options when they expect the price of the asset to fall in the market.

For instance, if a stock is trading at ₹100 and a trader expects the price to drop to ₹90, the trader may buy a put option with a strike price of ₹90. If the market price falls below the strike price, the trader can benefit from the decline in price.

Key Differences Between Call and Put Options

• Call options are used when traders expect the market to rise.
• Put options are used when traders expect the market to fall.
• Both options have a strike price, expiration date, and premium.
• They are widely used for trading, hedging, and building trading strategies.