Reference and Education

Understand Options Trading – Call And Put Options Explained With Examples

Options trading involves selling and buying options contracts in the F&O market. Two parties are involved, option buyer and writer. Technically, the writer bears more risk as he receives a premium from the buyer. If the market is opposed, then the options contract will expire worthlessly. The writer’s losses will not exceed the received premium Options Education.

There are two types of options 

Call and Put. In trading options, buyers pay a premium to receive the right to buy or sell without any obligation. In case you are uncertain about the direction of the market shortly then you can buy a call option and a put option to lessen your losses. If you are somewhat certain about future market movements or trends then buy a put option or call option, accordingly. 

Approach the Steady Options Education Center, to gain more knowledge about how the put and call options work. As you are new to options trade, it is essential to gain some basic knowledge and appropriate strategies that you can use in the derivative market. 

Call and put are derivative strategies. It is a contract between two entities. The contract buyer obtains a privilege to buy or sell the instrument and the contract seller is obligated to accept the buyer’s decision. 

Call option example

Assume that the shares of Nike Company are trading at $100 [strike price] today. If you feel that their share price will increase in a month, then you can lock in the current price and buy at this price in the future.

Meanwhile, another trader Ronnie is certain that Nike Company’s share rates will fall next month. He enters into a contract that will permit him to sell the shares a month later at $100 because he assumes the price to be much lower.

You enter into a contract with Ronnie. You buy the call option from Ronnie. It means you have the privilege to buy Nike Company’s shares from him at $100 one month later. You expect the price to increase until that time. 

You are the options contract buyer, while Ronnie is the options contract seller of the underlying asset. Ronnie is obligated to sell the shares and as compensation towards the loss he may incur if you did not use the option, he charges $10 as a premium. 

Put option example

Assume that the shares of Nike Company are trading at $100 [strike price] today. If you feel that their share price will decline in a month, then you can lock in the current price and buy at this price in the future.

Meanwhile, another trader Ronnie is certain that Nike Company’s share rates will rise next month. He enters into a contract that will permit him to sell the shares a month later at $100 because he assumes the price to be much higher.

You enter into a contract with Ronnie. You buy the put option from Ronnie. It means you buy the privilege to sell Nike Company’s share from him at $100 one month later. You expect the price to collapse until that time. 

Ronnie is obligated to sell the shares and as compensation towards the loss he may incur if you did not use the option, he charges $10 as a premium. 

If you don’t use the rights and it expires in both cases, then Ronnie gets to keep the premium. 

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button