Call Options vs Put Options | Universal Investment Strategies Reviews
Options Trading is a type of contract trading that allows the
option holder to buy or sell an underlying instrument at a pre-determined
price, otherwise known as a Strike Price, for a given time. All options are
considered as derivative contracts since their value is derived from an
underlying instrument.
There are mainly two types of Options that are traded, which are
known as Call Options and Put Options. In this article, we will discuss what
are Call and Put Options, how they work, and the main differences between
them.
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| Options Trading |
Call Options
Call Options can be defined as contracts that allow, but not
forces, investors to buy an underlying asset at a pre-determined Strike Price
before the due date. In simple terms, Call Options are like those shopping vouchers
that allow you to buy products at a sale price before the sale ends.
With this option, the investor expects the price of the instrument
to rise so that he can buy the instrument at a pre-determined price. In any
case, the best thing about having Call Option is that there is no limit to how
much profit you can gain since the price rise cannot be capped.
Put Options
Put Options can be defined as contracts that allow, but not
forces, investors to sell an underlying asset at a pre-determined Strike Price
before a give due date. You can also understand Put Options as an insurance
that protects your property when a loss occurs.
With this option, the investor expects a fall in prices, so that
he can then sell the instrument at a pre-determined price, which is usually
higher than the current market price. However, unlike Call Options, Put Options
do not have the option of unlimited profit, since the price can at the most
fall to zero, but never lower than that.
Differences between Call and Put Options
Call and Put Options may have the same concept but are
fundamentally different from each other. Some of the key differences between
Call Options and Put Options are mentioned below.
- The main difference is that Call Option allows the investor to buy the stocks, while the Put Option allows the investor to sell the stocks
- A Call Option generates money when the value of the instrument is rising, while the Put Option extracts money when the value of the instrument is falling
- Call Options can yield unlimited profits because there is no cap to price rise, while Put Options have limited profits due to mathematical restrictions
- Buying a Call Option requires the investor to pay a Premium, which is the price of the option, to the seller of the call option, but no margin of the amount is to be deposited at the stock exchange, however, while selling a Put Option requires the seller to deposit a certain amount at the stock exchange, which gives you the benefit of pocketing the Premium on the Put Option.
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