What it means when you are buying a call option, buying a put option, selling a call option and selling a put options with chart to help when to use which one.
All stock trading depends on 2 terms. Either you could be bullish or bearish. Depending on whether you are bullish or bearish on the underlying stock, you could purchase either a call option or a put option.
Buying a call Option
When you buy a call option, you hold the right to buy a specified quantity of the underlying stock at the strike price on or before the expiration date.
If you are bullish on a stock you could purchase a call option at a predetermine (Called it as the strike price) that is lower than the appreciation you expect then, if all goes well and the stock price does rise beyond the strike price + the premium you have paid, on or before the expiration of the contract, you can exercise your option to buy the stock at the strike price and simultaneously sell it in the spot market. i.e. the cash market to book your profit.
If, on the other hand the price of the stock in the cash market does not rise beyond the strike price + premium, you can let the contract lapse, i.e. you do not buy the underline stock at the strike price. Your loss in such a case would be premium you have paid. However in India equity options and futures are currently cash settled and are not settled by delivery.
Example
Current spot price per share = Rs 100
Premium payable per share = Rs 10
ABC company has a lot size = 50 shares
If the spot prices rises to Rs 120 per share before the contract expires you could exercise your option to buy the shares at Rs 100 and then sell them in the market for Rs 120. Your profit in this transaction would be Rs 500 (Sale price of Rs 120 x 50 – purchase of 100 x 50) – premium of 10 x 50)
If, on the other hand if the price does not go beyond Rs 100 until the expiry date, you could just let the contract lapse. In this case, your loss would be equal the premium that you have paid. i.e. Rs 500
Buying a put Option
When you buy a put option, you hold the right to sell a specified quantity of the underlying stock at the strike price on or before the expiration date.
If you are bearish on a stock you could purchase a put option at a pre-determine (strike price) that is higher than the fall you expect in the price of the stock,
If all goes well and the stock price does fall beyond the strike price + the premium you have paid, on or before the expiration of the contract, you can exercise your option to sell the stock at the strike price and simultaneously buy it in the spot market. i.e. the cash market to book your profit.
If, on the other hand the price of the stock in the cash market does not fall to the strike price + premium you can let the contract lapse, i.e. you do not sell the underlying stock at the strike price. Your loss in such a case would be premium you have paid.
Going with the above example if the spot prices depreciate to Rs 80 per share before the contract expires you could exercise your option to sell the shares at Rs 100 and then buy them in the market for Rs 80. Your profit in this transaction would be Rs 500 (Sale price of Rs 100 x 50 – purchase of 80 x 50 – premium of 10 x 50)
If, on the other hand if the price does not fall below Rs 100 until the expiry date, you could just let the contract lapse. In this case, your loss would be equal the premium that you have paid. i.e. Rs 500
Selling Call and put Options
You buy options from the seller called (Option Writer) who is obliged to comply with your decision for which he receive a fee. (The premium you pay to but an option)
If you exercise your option the option writer bears a loss which is the price differential between the spot price and the strike price less the premium income he has earned. However, when you let your option lapse, the option writer’s income is the premium you have paid to buy the option.
Remember the Option writer “return is limited” and “risk is un-limited”.
When to use which call and put options
- If you expect the price of the stock to move upward, buy a call option
- If you expect the price of the stock to move downward buy a put option
- If you expect no upward movement, sell a call option.
- If you expect no downward movement, sell a put option.
Hi Shabir , Thanks for the tips you shared. I was going through many other blogs and i was very much confused over this Option trading. Now I have a clearer picture . Thanks
Glad you liked it Sibi and don’t forget to share it with your friends on social media.
$MeToo!
Awesome.
Hi.. Shabbir, what a amazing tips you shared. you explained call put option with examples. It’s easy to understand.
Glad you liked it Rajat
hello , i want to start in option market . please give me a idea about it , how can start in it . i am new in stock market . only buy some stocks in cash market .
Follow the process that I follow. Details here – http://shabbir.in/roadmap-2016/
hi Shabbir, I want to know that if i have purchased the call option then how to settle the transaction? as you said to sell in the spot rate but that will not result the short and gone to auction and result in penalty and all? please clear my doubt. thank u..
You can always square off your your buy or sell with a counter trade and trading in spot is not squaring off.
thank u for your reply..
As You have written this:–
If you are bullish on a stock you could purchase a call option at a predetermine (Called it as the strike price) that is lower than the appreciation you expect then, if all goes well and the stock price does rise beyond the strike price + the premium you have paid, on or before the expiration of the contract, you can exercise your option to buy the stock at the strike price and simultaneously sell it in the spot market. i.e. the cash market to book your profit.
Now my question is if i exercise option to buy i have to sell it in the spot or i can square off in the option market itself without selling in the spot? couldn’t understand please answer it..
Sameer, let me explain you with an example
You buy a call option on XYZ stock at the strike price of Rs. 1500 at a premium of Rs. 100. If the market price of XYZ on the day of expiry is more than Rs. 1500, the option will be exercised. You will make profits if the the share price of XYZ crosses Rs. 1600 (Strike Price + Premium i.e. 1500+100).
If the price of the stock is Rs. 1800, the option will be exercised and you can buy 1 share of XYZ from the seller of the option at Rs 1500 and sell it in the market at Rs 1800 making a profit of Rs. 200 ((Spot price – (Strike price + Premium). In another scenario, if at the time of expiry stock price falls below Rs. 1500 say suppose it touches Rs. 1200, you will choose not to exercise the option. In this case you lose the premium of Rs 100 paid which shall be the profit of the seller of the call option.
I hope it helps.
Thanks again..
I understood the concept but suppose i exercise the call option then what to do? i.e. how the transaction completed..whether i have to sell at the cash market ? if yes then it is possible that i have exercised from option and got delivery? and then selling at the cash market? i hope you understood my question about the settlement of the option..
I have explained that Sameer, you buy the stock from the seller and then sell them at the current market price.
I understood about buying of call and put but what is the profit to the call and put seller as we call them as writer of option? only the premium received by them is the profit?
I explained that as well. In which pricing scenario it is profitable to whom.
In other case the profit is by the other party. I hope it helps.
Any clue on when does an option stock expire ?
1. If I purchase L&T CE 28-June 1350 today & if it is in profit for me throughout; how do I book my profit ? Do I have to rightclick –> sell etc? or does it happen automatically whenever you are in the money ?
2. Also, when does this expire ? on 28-June:3:30PM or on 28-June:9:15AM ?
Futures are contract that has an expiry date and time and normally expiry time is end of day and it should be 3:30PM
On the expiry date, can you setoff your option with physical stock ? if possible, how to place such a request?
Not sure if you can do anything with Physical stock. It has to be in Demat format.
One more query:
Suppose today (15-June), I purchased L&T CE 28-June 1350 at 35.95. Today, in NSE, L&T is 1323.75 & bullish.
On 20-June I see that L&T stock is 1400 and L&T CE 28-June 1350 is at say, 65.
How, how do I book my profit ? Should I – ?
1) sell it at 65 (L&T CE) i.e. at bid price ?
2) purchase L&T BE i.e. at ask price & it will get settled ?
Also, I hope we do have something called as bid / ask price in our Options trading window. I dont have access to the application and moneycontrol gives only one price (I’m not sure which one is that .. ask / bid).
Third, is the brokerage generally charged on buy + sell or one sided?
There is one price and normally it is the last traded price and not bid / ask price.
I went thru sharekhans marketwatch on their website (F&O) page for top gainers. Here, I was able to see everything set as CE or PE.. Are all these european options ? That is, do we have to wait until the due date to exercise the option ?
I believed only american options can be exercised before due date… However, the SK sales person says that PE NIfty can be exercised before due date as well :-S
Any clue ?
No Clue because I don’t trade in F&O
hi i am a interested in positional week trades need some guidance regarding to decide which options to buy at support or resistance. please guide us
Himanshu, have you seen – http://diytechnicalanalysis.com/technical-analysis/
If you expect the price of the stock to move upward, buy a call option
If you expect the price of the stock to move downward buy a put option
If you expect no upward movement, sell a call option.
If you expect no downward movement, sell a put option.
In the last two scenarios, when you are selling an option, are you playing the role of ‘writer’ of the stock ? Is that advisable? Is the seller / writer under obligation or under option to sell what he has committed ? Pls. correct if I’m wrong ?
Or Are you referring to selling the call/put option after you have bought it such that transaction is traded-out ?
ijay, These are the options you have and depending on your scenario, you take the position and we cannot state that anything is not advisable in any possible scenario.
u have explained nicely n rightly… i also believe the same & also doing the same way which u have mentioned above. u can suggest ur members to visit bazartrend.com as that site is providing online chart.
Aditya, thanks and surely will do.
“When to use which call and put options
1.If you expect the price of the stock to move upward, buy a call option
2.If you expect the price of the stock to move downward buy a put option
3.If you expect no upward movement, sell a call option.
4.If you expect no downward movement, sell a put option.”
I found these are some confusing. As you wrote, it is looking like similar. Like, buy a call option and sell a put option or buy a put option and sell a call option. Please explain me about that.
Thanks.
I have explained every possible thing in the complete post and the last one is just the summary of what you should be doing.
nice tecahing every body can understnad easily ..
The pleasure is all mine Sajid.
Shabir,
You know any reliable website where I can see beta values of stocks that are traded in indian stock markets?
I would like to know beta values of each stocks. It would be better If there is any consolidated list available.
Thanks
Salm
Salm, No I don’t track that and so will not be able to suggest you a site for that.
I think TTTK prestige is still a good bet at the current price. It has moved considerably yesterday.
A good scrip for trading as well.
If you know how to trade on the right side and is ready to cut your losses.
Hi.. Shabbir,
It is very very good & Informative & easy to understand for new investors about such articles CALL-PUT OPTION with Example .
I would like understand about MKT.Terms like Technical CHARTS like CANDLE STICK , LINE with Example as above.
Thanks A lot
Dinesh, See my technical analysis book
where should i open my demat account what things to be keep and ask while opning an demat account with any firm..i want to do online tradinf future and option
Is SMC is gud one?
See http://shabbir.in/stock-brokers-review/
Please reply on mail id .
a.pahuja1985@gmail.com
If you expect the price of the stock to move upward, buy a call option
If you expect the price of the stock to move downward buy a put option
If you expect no upward movement, sell a call option.
If you expect no downward movement, sell a put option
what is meaning of these in laymen term..with example..practical example where to use these thing with reason why we choose so and so option
can anybody reply me on this
Hi Shabbir,
I want to learn about the F&o in stock market.I am biggner.how should i go ahead ..wher to invest what is put call i mean these term for first what amout should i put ..should i go for index option put call or share option put call..how to analyse as as time passes i will learn but i dnt want to make loss for first time..
Please guide me .
I can open my demat account with any brokerage co..is there any margin i have maintain
Hi Akshit, I will suggest you to take first step and get into Cash segment before getting into F&O
what is cash segment ..why i should not go for furture and option.i can start with small portfolio say 5000
Cash segment is where you purchase and sell stock based on the available cash in your account where in F&O you can trade for few times your portfolio and so unless you know how to trade in F&O it should be best avoided.
Thanks for guiding me .now below mentioned put or call is also used in these cash segment
cash segment in online trading i guess.Is it
Everything (Cash as well as F&O) can be online and offline.
Dear Shabbir,
I am new to this NIFTY OPTION INDEX – CALL & PUT trading options…
To understand the concepts…
I have tried with one lot of NIFTY OPTION INDEX – 5900 strike price for CALL options on 21 Sep. and on 19 Nov. I have made profit of 357 and loss of 1,577 respectively.
For both the transactions the amount has been credited as profit and debited as loss from my demat linked AXIS Bank account.
I have made profit on 3rd Dec for the amount Rs. 750… But for this amount the trade note is showing opening debit balance 1577 and closing debit balance ie 827 (1577-750)…
Now my query is why its still showing debit balance in my trade note while they already debited the last loss amount from my bank account… i was expecting Rs.750 to be credited in my bank account…
I have cleared all my above position on same day…
How does this transactions works??? Can you pls explain this to me???
It will be helpful for all the new traders…
If you want i can send you my credit notes for my doubts…
Suraj
Suraj, I think you need to ask your bank about the details of the transaction and I only know what you say. If you made profit it should reflect and also the loss.
Simple words & easy to understand for a layman & very informative.
What is the best option to invest with regards to Pension ?
I have heard of New Pension Scheme, Pension Ulips .
kindly provide me free tips on call option an put options and nifty future
thanks
Dear Shabbir,
Thanks for the info here. I have recently invested for the first time in MF through SIP.
What %age would it return after 20 years?
Are there people who have made good return at this date?
I am not an astrologer who can predict the return for 20 years but yes I myself have made good returns for myself.
Hi
I wanted invest in NTPC.
tell me the best company to invest for long term
See http://shabbir.in/stocks-you-should-have-in-your-portfolio/
i am interested to trade in call & put option with only stocks but not in nifty what i am go to do, r u provide such tips if yes then please feel free contact me to on mail or mo,no.9823834811
Dear Sir,
I am having DMAT & Trading account with SBI cap,as the response & service is poor, i want to change the trading acount with different broker.
Please let me know, who are all good broking agents in terms of response,charges.
Regards
Ponneshwar Rao K.L.
Ponneshwar, have you seen – http://shabbir.in/review-of-all-stock-brokers/
Dear Sir,
I am having DMAT & Trading account with SBI cap,as the response & service is poor, i want to change the trading acount with different broker.
is this possible?pls let me know.
Regards
Ponneshwar Rao K.L.
Yes Why Not?
hi, actualy i want to invest meony in put and call option in australian market plese give me some idea.
thanks dipak
I have no idea on that
The article about call and put option is very nice and made me understand clearly the meaning.
What you want me to expand?