Call and Put

OPTIONS

BY SAJNA FATHIMA

• An option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price.

• The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the corresponding obligation to fulfill the transaction.

Options

Option Classifications

• Call Option : an option which gives a right to buy the underlying asset at a strike price.

• Put Option : an option which gives a right to sell the underlying asset at strike price.

• Call Option: Right but not the obligation to buy

• Put Option: Right but not the obligation to sell

• Option Price: The amount per share that an option buyer pays to the seller

• Expiration Date: The day on which an option is no longer valid

• Strike Price: The reference price at which the underlying may be traded

• Long Position: Buyer of an option assumes long position

• Short Position: Seller of an option assumes short position

Some Terminologies

• Both the Call and Put option buyers are buying the rights, that is they are transferring their risks to the sellers of the option.

• For this transfer of risk to the sellers, buyers have to compensate by paying Option Premium.

• Option premium is also known as Price of the option, Cost or Value of the option.

CALL OPTION

• A call option is a financial contract between twoparties, the buyer and the seller of this type ofoption.

• It is the option to buy shares of stock at aspecified time in the future.

• Often it is simply labelled a "call".• The buyer of the option has the right, but notthe obligation to buy an agreed quantity of aparticular commodity

• The buyer pays a fee (called a premium) for thisright.

• Put Option is just opposite of the Call Optionwhich gives the holder the right to buy shares.

• A put becomes more valuable as the price ofthe underlying stock depreciates relative to thestrike price.

PUT OPTIONS

Call Option Buying

A Call option buyer basically is bullish about the underlying stock.

Put Option buying

• A buyer of put option is bearish on underlying stock.

Exercise of calls

Exercise of Puts

Summary of basic option strategies

Merits of Options

• Options protect downside risk to the buyer

• The buyer of the option limits losses to the premium paid on the purchase of the options

• Eg. If I buy a nifty 2900 put at Rs 34, my loss is limited to Rs 34 while gain potential is limitless

• If the price goes above Rs 2900 I do not exercise the option limiting my loss to the premium paid.

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