OPTION CALL PUT ADVICE FOR 12 FEB 2024

Call and put options are two types of financial instruments available in the stock market. A call option is utilized when investors anticipate an increase in stock prices, while a put option is employed when prices are expected to decline.

Despite being dubbed as "weapons of mass destruction," these tools, when used judiciously, can significantly impact one's career positively.

Let's delve into the details and gain a better understanding of call and put options!

Options

An options contract grants the buyer the right, but not the obligation, to buy or sell an underlying asset. Its value is derived from the underlying asset, which could be stocks, currencies, or commodities.

Options Available

Call option

Put option

Call Option

This contract grants the buyer the right (but not the obligation) to buy the asset at a specified price before the contract's expiration date.

Put Option

This option gives the buyer the right (but not the obligation) to sell the asset at a predetermined price before the contract's expiration.

What Is a Call Option?

Call options are financial derivatives that offer the holder the right to purchase a specific quantity of an underlying asset at a predetermined price and date. It provides investors with the opportunity to profit from asset price appreciation without committing to buying the asset outright. Call options are commonly used for speculation and hedging purposes in the market.

How Do Call Options Work?

Call options are traded on stock exchanges and can involve various securities like currencies and ETFs. The buyer pays a premium to acquire the option, which gives them the right to purchase the underlying security at a predetermined price. Equity call options typically involve 100 shares per contract. The option holder can exercise their right to buy the shares if the underlying stock price surpasses the strike price on expiration.

The buyer's profit is determined by the difference between the spot price and the strike price of the contract. A call option can be in-the-money (ITM) or out-of-the-money (OTM) depending on the market price's relationship to the strike price.

How to Calculate Call Option Payoffs?

The payoff of a call option depends on variables such as the strike price, option premium, and expiration date. The profit for the buyer is the difference between the spot price and the strike price, minus the premium paid. For the seller, the profit is limited to the premium received.

Example:

Suppose you purchased a call option with a premium of ₹50 and a strike price of ₹200. If the stock price exceeds ₹300, you will exercise your right to buy the shares, resulting in a profit.

What Is a Put Option?

Put options are financial contracts that provide the holder with the right to sell a specified quantity of underlying securities at a predetermined price within a set time frame. Traders use put options to profit from declining asset prices or hedge against potential losses. They are commonly used for risk management and speculative purposes in the market.

How Do Put Options Work?

Traders use put options to hedge and speculate in a bear market when asset prices are expected to decline. The premium of a put option increases as the underlying stock price decreases. Put options give the holder the right to sell the underlying stocks when prices fall.

How to Calculate Put Option Payoffs?

The buyer of a put option makes a profit when the underlying stock price falls below the option strike price. Conversely, if the stock price rises, the buyer may let the contract expire, incurring a loss equivalent to the premium paid. For the seller, the profit is limited to the premium received, while the potential loss is unlimited.

Risks and Rewards In The Two Options

Call Buyer: Unlimited profit potential; maximum loss is limited to the premium paid.

Call Seller: Unlimited loss potential; maximum profit is limited to the premium received.

Put Buyer: Limited profit potential; maximum loss is limited to the premium paid.

Put Seller: Limited profit potential; maximum loss is unlimited.

These basics can provide valuable insights into options trading, but mastering the market requires extensive knowledge and practice. It's crucial to carefully consider all potential profits and risks before making investment decisions.