A Call Option: What Is It?
Using a call option, the buyer gets the right to purchase an asset before the contract expires at a specific price, known as the strike price.
As an illustration, let’s say you purchase a call option on ABC stock with a Rs.150 strike price.
You can still purchase ABC company shares for Rs.150 and then sell it for a profit at the market price if its price increases to Rs.170.
You are not required to purchase the stock if it never rises above Rs.150. Only the premium—the amount you paid for the option—is lost.
when to buy call option?
You believe the stock price will go up.
You want to control a stock without buying it outright.
You want to limit your loss to just the option’s premium.
What Is a Put Option?
Before the contract expires, the buyer of a put option has the right to sell the asset at the strike price.
Let’s say you purchase a put option on ABC stock with a Rs.150 strike price.
You can still turn a profit by selling ABC stock for Rs.150 even if it drops to Rs.120
You just let the option expire and only lose the premium if the stock remains above Rs.150
When to Use Put Options:
You believe the stock price will go down.
You want to protect your investments if the market falls (hedging).
You want a flexible way to bet against a stock
Here we only discussed about two types of option and buying of these options …