This article covers the fundamental differences between call and put options. Prior to going into the details, it is critical to have a basic understanding of what an option is. The most straightforward definition of an option is that it is a contract that grants the buyer the right to purchase or sell an underlying asset or security by a certain date at a predetermined price. Let’s now take things a step further by digging deeper into put and call options.
Put options are speculative investments for traders who believe the asset’s price will decrease within a given period. For this particular transaction, the underlying asset’s strike price would be the one at which traders may sell it. A stock put option, for instance, that carries a strike price of $50 has the ability to be sold before the expiry date by the purchaser for $50.
A premium is paid to acquire the right to sell a stock for a certain price over a certain period of time. Writing put options is an efficient way of earning money since this premium is paid to the put seller.
It is not difficult to figure out the cost of the put option. When using put options, you’re purchasing a position that gives you 100 shares of the underlying stock. This means you need to multiply the current stock price by 100 to calculate the price of the option.
In call options, traders purchase shares with the expectation that the underlying asset’s price would increase in the designated time period.
When trading call options, the strike price is the price at which the buyer will be able to acquire the underlying asset. Buyers of a call option that carries a strike price of $50 have the provision of purchasing the shares for $50 before the option expires.
The use of the call option is advised only if the existing price of the underlying asset is lower than the strike price. If it isn’t, buying the asset on the market will yield more returns.
Call options, like put options, have an associated premium price that needs to be paid in order for you to enjoy the right to acquire the underlying stock at the strike price. The call seller is the one who is the beneficiary of the premium.
The procedure for calculating the call option is identical to that for the put option. To figure out the cost of the contract, multiply the price by 100.
In a nutshell, call and put options are quite different from one another. Call options are bought by investors who believe a stock will increase, while put options are sold by investors who believe a symbol will decline. The benefits of options come at the price of having a certain amount of risk, whether the trade is done via call or put options. If you’re okay with taking chances, though, you may gain significant profits.