Put Call in Option Trading
Put Call are the terms used in Options trading. Read more about Put option and Call option in the following article.
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 specific date.
After the specified date, this contract expires.
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 25, so the buyer has to buy a contract of 25 numbers. Means, he has to spend Rs 30 x 25 = Rs. 750/- 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 25 shares = Rs. 7,500
So his final profit value will be : Rs. 7,500 - Rs. 750 = Rs. 6,750/-
In the above example this trader risked Rs. 750 and made Rs. 6,750/-. Now, if the market falls and the value of Nifty is Rs. 4300 on expiry date. Then he will loose only the contract value only (Rs. 750).
Caution : Proper knowledge about Options trading is a must before you actually start to trade options. The risk of loosing money is very high in derivatives trading.
Recommended Read :
- What is a Derivative?
- Difference Between Futures and Options
- What are Futures How to Trade in Futures?
- How can Derivatives protect your Stock Investment?
- What is Hedging?
- Difference Between Hedging and Speculation
- Relation Between Spot and Futures Price
- What are Stock Index Futures?
- Insuring Stock Portfolio with Protective Put
Hi Gayatri. I have question regarding the value of Rs. 30 you mentioned in the above example? How does a buyer arrive at that value or Rs. 30? Also, if the stock price on the expiry date remains same i.e. Rs. 4500, then will he get his invested contract money back? At what value of stock will there be break-even? And do we need to pay commission to the broker while trading in options?