Question

Indicate the difference between a call option and a put option?

Answer 1

For understanding the difference between call and put option we need to know what is option first.

Option means Rights but no obligations. Simply when we have rights to choose is called option and every option comes with a price which is called premium.

Now let say 2 party Adam and Eve. Adam buy option from eve this means Adam is buying right to do or not to do something from eve. and eve will chrge him some money which is know as premium.

So Adam has the rights and eve has the premium. Adam is free to make choice, Eve has to respect the choice of adam.

Now,

A call option is the option of buying something at a predefined price in future irrespectice of the change in furture. So basically call option is the option of Upward movement. When we expect that price will go up in future, we buy call option so that when the price actually goes up in future we can buy the stock at the predefined price of our option. So Call option is for UP.

On the contrary Put option is the option of Selling something at a predefined price in future irrespective of the change in future. Put option is the option of Downward Movement. When we expect that price will go down in future, we buy put option so that when the peice will actually fall in future we can still be able to sell in that predefined price of our option. So Put option is for Down.

Let say a share price today is $100, we expect price to go up in 3month to $150. So we expect UP we buy call option. Let say premium is $10 for buying the option. We bought it by paying $10. So it means that we have bought the option to buy the stock at $100 after 3 months. Now let say price becomes $150 after 3months but we will buy the stock at $100 only irrespective of the change.

On the other hand let say price is $100 today and we expect down movement that price will become $50 in 3months. So we buy put option by paying premium say $10. So it means we can sell the stock at $100 after 3months irrespective of what the price will be after 3months. Now after 3months let say price becomes $50 but we will be still be able to sell it at $100 only.

I hope you understand the concept please hit the like button if so and feel free to comment. Thank you. Your review matters a lot.