Options trading is a powerful tool in financial markets, allowing investors to hedge risks, speculate on price movements, and enhance portfolio strategies. Among the various types of options, put and call options are the most commonly used.
What Are Options?
Options are financial derivatives that give traders the right—but not the obligation—to buy or sell an asset at a predetermined price within a specific time frame. They are used in stock markets, commodities, forex, and even cryptocurrencies.
There are two main types: Call Options and Put Options.
What Is a Call Option?
A call option gives the holder the right to buy an asset at a fixed price (strike price) before the option expires. Investors buy call options when they expect the price of the asset to rise.
👉 Example: Suppose a stock is trading at ₹1,000, and you buy a call option with a strike price of ₹1,100 for a premium of ₹50. If the stock rises to ₹1,200, you can buy it at ₹1,100 and make a profit of ₹50 per share (₹1,200 – ₹1,100 – ₹50 premium).
What Is a Put Option?
A put option gives the holder the right to sell an asset at a fixed price before expiration. Investors buy put options when they expect the asset’s price to decline.
👉 Example: Suppose a stock is trading at ₹1,000, and you buy a put option with a strike price of ₹900 for a premium of ₹40. If the stock falls to ₹800, you can sell it for ₹900, making a profit of ₹60 per share (₹900 – ₹800 – ₹40 premium).
Key Differences Between Call and Put Options
| Feature | Call Option | Put Option |
|---|---|---|
| Right to | Buy | Sell |
| Profitable When | Stock price rises | Stock price falls |
| Risk | Limited to premium paid | Limited to premium paid |
Advantages of Options Trading
✅ Leverage: Small investments can control large stock positions.
✅ Risk Management: Hedging strategies reduce potential losses.
✅ Flexibility: Options can be used for speculation or protection.
Risks of Options Trading
❌ Premium Loss: If the market moves against you, you may lose the premium paid.
❌ Time Decay: Options lose value as expiration nears.
❌ Complexity: Requires understanding of market trends and pricing.
Put and call options offer investors strategic ways to profit from market movements. While they can enhance returns and hedge risks, they require careful planning and risk management. Beginners should learn the basics and practice with paper trading before investing real money.
