When I started my journey in the stock market, even I was not sure of a few terminologies related to this new world 10 years back. But with time, experience, & determination we can excel in any field. Our sole motto is to advise you how you can make maximum profits so you should know these terms and their key difference with other terms. This series will be beneficial for newbies looking for the pot of knowledge. Let’s discuss the difference between call and put option with examples to understand these options contracts.
Call and Put Option
Before we understand the difference between these two options. Let’s take a look at the Option Contract first as both are the types of options contracts only. As we know Option contracts offer an opportunity to buy or sell an underlying asset at a preset price and date between two agreed parties. Thus, it gives the right to the holder but not the obligation to exercise the contract.
In a similar context, the call and put options work. Options are categorized into a call and put options. With the Call option, the buyer of the contract holds the right to buy the underlying asset at a preset price on the specified date in the future. Whereas the put option allows the buyer of the contract to sell the underlying asset at a preset price on a specified date.
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Let’s take the example of the Call Option. If the stock of HUL is trading at Rs.2500 and the option strike price is Rs.2200. Thus, you pay a premium to buy this option at Rs.10 per share. Thereby, you making a profit of Rs. ( 2500-2200+10)= Rs. 290. If the buyer buys one option contract that means he can make Rs 2900 as a profit. However, if at the expiry the stocks trade below Rs.2500 then he has a right not to exercise this contract however he will lose the premium paid to buy this call option of Rs.1000. Now you can understand the beauty of the call option.
Similarly, let’s understand the put option with an example. Suppose investors buy a put option for HUL currently trading Rs.2500 with a strike price of Rs.2000 before the expiry of next month. Now investors will pray the prices to fall so to benefit out of this put option as he paid a premium of Rs.10 per share and bought one put contract of 100 shares. Let’s talk about the positive side of this contract if he exercises the contract if he owns those 100 shares at Rs.1800. Then his net profits stood at Rs. ( 2000-1800-10)= Rs.190 per share or Rs.19000 per put contract.
What if he does not own any shares of HUL and he bought put option only for speculation. To exercise this put option, firstly he has to buy the shares at the current market price and sell it at a preset price. Then his profit will be Rs. (2000-1950-10)= Rs 40 per share or Rs.4000 per put contract.
Therefore, the only loss to which the holder is exposed is the premium paid out. And the maximum gain you can earn from the stock price fell to Rs.0
Please find the key difference between both the option derivatives:
|Call Option||Put Option|
|It gives you the right but not the obligation to buy the underlying securities at a preset price on the specified date||It gives you the right but not obligation to sell the underlying securities at a preset price on the specified date|
|When you buy a call option then you expect the price of the stock to rise.||When you buy a put option then you expect the price of the stock to fall.|
|Maximum profits you cannot limit as the price of the stock can rise to any amount.||However, the gains are limited up to the price zero of the stock.|
To sum up, I would say if you have an appetite to bear the losses of premium paid then only you play in option contracts. As these contracts are purchased in the lot. To make maximum gains, speculation, the direction of price movement with the financial ability you can churn profits or else you end up losing your money.
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