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Put and Call are the terms used in Options trading.
What is a Put Option?
A Put option is a type of contract that gives a trader the right to sell the underlying stock ( eg. Infosys, Reliance) or index (eg. Nifty) at a specific price called "Strike Price" on or before a specified date known as "Expiry Date"
When should you Buy a Put?
A put option should be brought, when the trader is expecting a fall in the price of stock or index. The price of the Put option will increase, when the stock price decreases.
What is a Call Option?
A Call option is a type of contract that gives a trader the right to buy the underlying stock ( eg. Infosys, Reliance) or index (eg. Nifty) at a specific price called "Strike Price" on or before a specified date known as "Expiry Date"
When should you Buy a Call?
A Call option should be brought, when the trader is expecting a rise in the price of stock or index. The price of the Call option will increase, when the stock price increases.
What is Options Trading?
Options trading is trading of option contracts of underlying stock or index. An option contract gives the trader the right (not obligation) to buy or sell a stock or index at a specific price on or before a specic date.
After the specified date, this contract will not exist.
Example :
Lets say that the value of Nifty is 4500
If a trader feels that the Nifty may go up to 4800. He may buy the "Call Option" with strike price of 4600 at a value of Rs. 30/- for one. Currently the lot size of Nifty is 50, so the buyer has to buy a contract of 50 numbers. Means, he has to spend Rs 30 x 50 = Rs. 1,500/- for this contract.
If the market moves as anticipated and Nifty has a value of 4900 on the expiry date.
This contract gives him a profit of Rs. 300 per share.
The whole contract gives him profit of : Rs. 300 x 50 shares = Rs. 15,000
So his final profit value will be : Rs. 15,000 - Rs. 1,500 = Rs. 13,500/-
In the above example this trader risked Rs. 1,500 and made Rs. 13,500/-
Now if the market falls and the value of Nifty is Rs. 4300 on expiry date. Then he will only loose the contract value only (Rs. 1,500).
Caution : Proper knowledge about Options trading is must before you actually start to trade options. The risk of loosing money is very high in derivatives trading.
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