An option is kind of a derivative. It is a contract or a provision of a contract. The option gives the option holder a right to perform a transaction with the option issuer as per a certain term. The two types of options are calls and puts. The basic difference between the call option and the put options is that the call option allows the buyer a right to buy the underlying asset. The put option allows the buyer a right to sell the underlying asset.
Here is a quick guide to these two options. The call and put options have these variants:
- One can buy a call option
- One can sell a call option
- One can buy a put option
- One can sell a put option
As a trader, you can do a mix and match and make some strategies called as ‘Option Strategies’. A smart trader often uses these four variants to make some lucrative gains.
To summarize the option positions, go through the table below.
|Market||Option Type||Also called||Other things to do||Premium|
|Bullish||Buy Call Option||Long Call||Buy Futures or Buy Spot||Pay|
|Flat or Bullish||Sell Put Option||Short Put||Buy Futures or Buy Spot||Receive|
|Flat or Bearish||Sell Call Option||Short Call||Sell Futures||Receive|
|Bearish||Buy Put Option||Long Put||Sell Futures||Pay|
There are two situations to buy an option:
- You can buy to create a fresh option position, which is called as long option
- You can buy to close an existing short position, which is called as square off position.
Likewise, there are two situations to sell an option:
- You can buy to create a fresh short position, which is called as short option or writing an option position
- You can buy to close an existing long position, which is called as square off position.
You must buy an option whether call or put, only when you hope that market will move strongly towards a direction. The option buyer will gain when the market moves away from the strike price. Though, choosing the right strike price is challenging for the trader.
Similarly, you must sell an option whether call or put, when you hope that the market will not go into any extremes and will mostly remain flat or below the strike price in case of calls option and above strike price in case of put.
The trader can buy call option if they have a feeling that the stock price of an underlying asset might increase and he may sell a call option if he thinks it will fall. The seller of the call option, will gain more if the price of the underlying shares falls.
The Nifty put option buyer gains if the price of the underlying stock reduces. And, the value of a put option increases as the price of the underlying stock falls. Hence, the sellers of the put options wants to have the option to expire with the price of the underlying stock higher than the option’s strike price.
Check out all the nifty put call ratio values live on BloombergQuint.