Where are the put and call options used?

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Many terms related to equity derivatives trading are not easily understood. Options, calls and puts are also included in such words. What is their meaning and how are they used in the context of the market, know here.

1. What are equity options?

You must be eating yogurt. Its prices depend on milk. If milk is expensive, then the price of curd will also increase. Similarly, the value of equity option depends on indexes like Nifty and Bank Nifty. There are two types of these instruments. Call and put option. You can trade in calls and puts of an index or a stock.

2. What are call and put options? 

The buyer of the call gets the right to buy the underlying stock (which will affect the call if prices fall or decrease) at a fixed and fixed price.

These are purchased by paying premium. It is a part of the total price. Similarly, in a put, the buyer gets the right to sell the shares. The seller who sells the call gets a premium from the buyer. It has to give shares to the buyer at the price of the contract. Similarly the put seller has to sell the shares.

3. How do they actually work?

Let's say that on April 29, the trader buys a 14300 call from the Nifty. Its duration is to end on April 29. Suppose the price of each share of a call is Rs 62.

A contract consists of 75 shares. Let's say that the Nifty closes at Rs 14500 on April 29. In this way, 100 rupees will be called 'in the money' in 14300 calls. In this, the seller of the call will pay the trader in the ratio of Rs 100. That is, the trader will get an advantage of Rs 38 on every share of Rs 62. This is 61 percent of the total return on investment.

Now let us assume that the Nifty closes at 14200 instead of 14300. In this case, 100 rupees will be called 'out of the money' in a call of Rs 14300. In this, the call buyer will lose the entire premium (Rs 62) in the hands of the seller.

The same applies for put. The only difference is that the buyer will benefit if the Nifty falls. At the same time, as the Nifty increases, the seller will keep the premium.

4. How is it different from Future?

In the illustration you saw that the buyer's loss is limited to the premium paid. However, the seller's loss of calls and puts can be unlimited. Practically, buyers of calls and puts can get unlimited benefits. In the case of the future there is no limit to the profit or loss of the buyer or seller.