A Beginner's Guide to Call and Put Options
A Beginner's Guide to Call and Put Options: Simplified with Examples
Options trading can seem complex, but it's actually quite intuitive once you understand the basics. In this guide, we’ll break down what call and put options are and how they can be used to your advantage.
What Exactly Is an Option?
Most definitions might sound confusing, but let's break it down with a simple example.
Imagine you want to take a flight in three months, and today, the ticket costs ₹5,000. You can pay ₹500 today to reserve that price for three months. If, in three months, the price jumps to ₹10,000, you still have the right to buy the ticket at ₹5,000, saving ₹5,000. If the price falls to ₹3,000, you can let your reservation expire and buy the cheaper ticket, losing only the ₹500 you paid to reserve it.
This reservation system is essentially what an option is—a contract that gives you the right, but not the obligation, to buy or sell an asset at a set price (strike price) on or before a specified date (expiry).
Call Option: Buy at Your Price
A call option gives you the right to buy an asset at the strike price. Let’s break it down:
- Example: You believe the Nifty index will rise. You buy a call option for ₹200, which gives you the right to buy Nifty at 25,000 within the next month. If Nifty rises to 27,000, you can sell your option for the difference (27,000 - 25,000), earning a profit of ₹1,800 (minus the ₹200 you paid).
- If Nifty doesn’t rise, your only loss is the ₹200 you paid for the option.
image of call option on Punch - showing the call premium with the strike price
Put Option: Protect Your Investment
A put option allows you to sell an asset at a predetermined price, giving you protection if the market falls.
- Example: You bought shares of a tech company for ₹1,250 each. The price drops to ₹1,000, but since you had bought a put option with a strike price of ₹1,250, you can still sell your shares at ₹1,250, avoiding a ₹250 loss per share. The cost of this put option was ₹30, meaning your net loss is only ₹30 instead of ₹250.
image of put option on Punch - showing put premium with strike price
Why Use Options?
Options provide flexibility and risk management. You can either speculate on the market’s direction using call options or hedge your positions with put options. Unlike directly buying or selling stocks, options give you the ability to benefit from price movements while limiting your losses to the premium you paid.
Call and Put Options: A Quick Recap
- Call Option: Gives you the right to buy an asset at the strike price. It's useful when you expect the market price to go up.
- Put Option: Allows you to sell an asset at the strike price, protecting your investment if the market price falls.
Get Started with the Punch App
If you’re feeling overwhelmed, don’t worry! The Punch app simplifies the process for beginners. With a clean interface and easy-to-use tools, you can start exploring options trading confidently.
Download the Punch app today and begin trading with ease.
Bonus: Watch Our Free Video Series
Check out our Move Like Arshad video series for quick tips on options trading, with 3-minute videos packed with valuable insights. https://punn.ch/mla/playlist