Options Trading is a type of contract trading that allows the option holder to buy or sell an underlying instrument at a pre-determined price, otherwise known as a Strike Price, for a given time. All options are considered as derivative contracts since their value is derived from an underlying instrument.
There are mainly two types of Options that are traded, which are known
as Call Options and Put Options. In this article, we will discuss what are Call
and Put Options, how they work, and the main differences between them.
Call Options
Call Options can be defined as contracts that allow, but not forces,
investors to buy an underlying asset at a pre-determined Strike Price before
the due date. In simple terms, Call Options are like those shopping vouchers
that allow you to buy products at a sale price before the sale ends.
With this option, the investor expects the price of the instrument to
rise so that he can buy the instrument at a pre-determined price. In any case,
the best thing about having Call Option is that there is no limit to how much
profit you can gain since the price rise cannot be capped.
Put Options
Put Options can be defined as contracts that allow, but not forces,
investors to sell an underlying asset at a pre-determined Strike Price before a
give due date. You can also understand Put Options as an insurance that
protects your property when a loss occurs.
With this option, the investor expects a fall in prices, so that he can
then sell the instrument at a pre-determined price, which is usually higher
than the current market price. However, unlike Call Options, Put Options do not
have the option of unlimited profit, since the price can at the most fall to
zero, but never lower than that.
Differences between Call and Put
Options
Call and Put Options may have the same concept but are fundamentally
different from each other. Some of the key differences between Call Options and
Put Options are mentioned below.
·
The main
difference is that Call Option allows the investor to buy the stocks, while the
Put Option allows the investor to sell the stocks
·
A Call
Option generates money when the value of the instrument is rising, while the
Put Option extracts money when the value of the instrument is falling
·
Call
Options can yield unlimited profits because there is no cap to price rise,
while Put Options have limited profits due to mathematical restrictions
·
Buying a
Call Option requires the investor to pay a Premium, which is the price of the option,
to the seller of the call option, but no margin of the amount is to be
deposited at the stock exchange, however, while selling a Put Option requires
the seller to deposit a certain amount at the stock exchange, which gives you
the benefit of pocketing the Premium on the Put Option.
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