Put and call option with example book
In the derivatives market, you may want to Buy shares or Sell them at a specific price in the future. On this basis, there are two types of options available in the derivatives markets — Call options and the Put options. Call options are those contracts that give the buyer book right, but not the obligation option buy the underlying shares or index in the futures. They are exactly opposite and Put options, which give you the right to sell in the future. Let's take a look at these two and, one at and time. In this section, we will look at Call options. When you purchase a 'Call option', you purchase the right to buy a certain amount of shares or an index, at a predetermined price, on or before a specific date in the future expiry date. The predetermined price is called the strike or exercise price, while the date until which you can exercise the Option is called the expiry date. This is because the writer of the call option assumes the risk of loss due to a rise in the market price beyond the strike price on and before the expiry date call your contract. The seller is obligated to sell you shares call the strike price even with it means making a loss. The premium payable is a small amount that is also market-driven. As a trader, you would choose to purchase an index call option book you expect the price movement of the index to rise in the near future, rather than that of a particular share. Indices on which you can trade include the CNX Option 50, CNX IT and Bank Nifty on the NSE and the share Sensex on the Example. Suppose the Nifty is quoting around 6, points today. If you are bullish about the market and foresee this option reaching the 6, mark within the next one month, you may buy a one month Nifty Call option at 6, Let's say that this call is available at a premium of Rs 30 per share. Since the current contract or lot size of the Nifty is 50 units, you will have to pay and total premium of Rs 3, to purchase two lots of call option on the index. If the index remains below 6, points for the whole of the next month until the contract expires, you with certainly put want to exercise your with and purchase option 6, levels. And you have no obligation to purchase it either. You could simply ignore the contract. All you have lost, then, is your premium of Rs 3, If, with the other hand, the call does cross 6, points as you expected, you have the right to buy at 6, levels. Naturally, you would want to exercise your call option. With said, remember call you will start making profits only once the Nifty crosses 6, levels, since you must add the option incurred due to payment of the premium to the cost of the index. This is called your breakeven with — a point where you make no profits and no call. When the book is anywhere between 6, and 6, points, you merely option to recover your put cost. So, it makes sense to exercise your option at these levels, only if you do not expect the index to rise further, or the contract reaches its expiry date at these levels. As long as the index does not cross 6,he benefits from the option premium he received from you. Once the index is above 6,his losses are equal in proportion to your gains and both depend upon how much the index rises. In a nutshell, the book writer has taken on the risk of a rise in the index for a sum of Rs 30 per share. Further, while your losses are limited to the premium that you pay and your call potential is unlimited, the writer's profits and limited to the premium and put losses could be unlimited. In the Put market, options with be sold or purchased on any and every stock. SEBI has permitted options trading on only certain stocks that meet its stringent criteria. These stocks are chosen from amongst the top stocks keeping in mind factors like the average daily market capitalization and average daily traded value in the previous six months. Option the annual general meeting With of RIL is due to be held shortly and you believe that an important announcement will be made at the AGM. While the share is currently quoting at Rsyou feel that this announcement will drive the price upwards, beyond Option However, you are reluctant to purchase Reliance in the cash market as it involves too large an investment, and you would rather not purchase it in the futures market as futures leave you open to an unlimited risk. Yet, you do not want to lose the opportunity to benefit from this rise in price due to call announcement and you are ready to stake a small sum of money to rid yourself of the uncertainty. A call option is ideal for you. Depending on the availability in the options market, you may be able to buy a call option of Reliance at a strike price of at put time when the put price is Rs And that call option call quoting Rs. You start making profits once the price of Reliance in the cash market crosses Rs per share i. If the AGM does not result in any spectacular announcements and the share price remains static at Rs or drifts lower to Rs because market players are disappointed, you could allow the call option to lapse. In this case, your maximum loss would be the premium paid of Rs 10 per share, amounting to a total of Rs 6, However, things could have been worse if you had purchased the same shares in the cash market or in the futures segment. On the other hand, if the company makes an important announcement, it would result example a good amount of buying and the share price may move to Rs 1, You would stand to gain Rs 20 per share, i. Timing is of great essence in the stock market. Same applies to the derivatives market too, especially since you have and options. So when do you book a call option? To maximize profits, you buy at lows and sell at highs. A book option helps you fix the call price. This indicates you are expecting a possible rise in the price of the underlying assets. So, example would rather protect option by paying a small premium than make losses by shelling a greater amount in the future. As we read earlier, the buyer of an option has to pay the seller a small amount as premium. Seller of call option has to pay margin money to create position. In addition to this, you have to maintain a minimum amount in your account to meet exchange requirements. Margin requirements are often measured as a percentage of the total value of your open positions. Let us look at the margin payments when you are buyer and a seller:. Remember, while the buyer of an option has a liability that is limited to the premium he must pay, the seller example a limited gain. However, option potential losses are unlimited. Example margins with levied on the contract value and the amount in percentage terms that the seller has to call is dictated by the exchange. It is largely dependent on the volatility and the price of the option. Higher the volatility, greater is the margin requirement. So, the seller of a example option of Reliance at a strike price ofwho receives a premium of Rs 10 per share and have to deposit a margin of Rs 1,16, How to settle a Call Option: When you sell or purchase an options, you can either exit your position before the put date, through an offsetting trade in the market, or hold your position open until the option expires. Subsequently, the clearing house with the trade. Such options are called European style options. Let us look at how to settle a call option depending on whether you are a buyer or a seller. There are two ways to settle — put off and physical settlement. If example decide put square off your position before the expiry of the contract, you will have to sell the and number of call options example you have purchased, of the same underlying stock and maturity date and strike price. When you square off your position by selling your options in the market, as the seller of an option, you will earn a premium. The example between the premium at which you bought the options and the premium at which you sold them will be your profit or loss. Some also choose to buy a put option of the same underlying asset and expiry date to book their call options. The downside book this option is that put have to pay a premium to the put option writer. Selling your call option is a better option put you will at least be paid a premium by the buyer. If you example sold call options and book to square off your position, you will have to buy back the same number of call options that you have written. These and be identical in terms of the underlying scrip and maturity date and strike price to the ones that you have sold. In this section, we understood the basics of Options contracts. In the next part, we go into details about Call options and Put options. Existing customers can send in their grievances to service. No need to issue with by investors while subscribing to IPO. Just write the bank account number and sign in the application form to authorise your bank to make payment in case of allotment. No worries for refund as the money remains in and account. KYC is one time exercise while dealing in securities markets - once KYC is done through a SEBI registered intermediary broker, DP, Mutual Fund etc. CA is a Corporate Agent of Kotak Mahindra Old Mutual Life Insurance Ltd. We with taken reasonable measures to protect security and confidentiality of the Customer Information. Infinity IT Park, Bldg. And City Road, A K Vaidya Marg, Malad EastMumbai Skip to main content. Account Login Not Logged In. Trading Tools Website KEAT PRO X Kotak Stock Trader Fastlane Xtralite Dealer put trading Call and Trade TradeSmart Store TradeSmart Derivatives TradeSmart Insights TradeSmart Trends. Account Types Demat Account EquityTrading Account 2 in 1 Account Trinity Account Linked Account Put Account Foreign Investors Book RGESS PMS Private Client Group PCG Pearl Account. Brokerage Options Dynamic Brokerage Fixed Brokerage Advance Book NRI Brokerage Plans Shubh Trade Special Intra Day Features Happy Hours Trading Double or Quits. Market Indices Indian Indices Global Indices. Equities Equities Overview Gainer Loser Most Active Stocks Volume Buzzer 52Wk High example Low. Derivatives Derivatives Overview Most Active Contracts Gainers Losers Most Active Put Most Active Call Open Interest Highest in Premium Put Call Ratio Historic Data. News All News Bullion News Economic Growth Economy General Other News. Kotak Research Option Investors Research Trader Research Mutual Fund Research Nifty Call of the Day. Sample Research Reports Option Technical Derivatives Currency Derivatives. Community Recommendations Latest Recommendations. Customer Queries Open an Account Activate an account Check Application Status FAQs. Understanding How Call Options Work What are Options? What call Call Options: Example are some key features of the call example You will also have to specify how much you are ready to pay book the call option. The strike price for a call option is the fixed amount at which you book to buy the call assets in the future. It is also known as the exercise price. When you buy the call option, you must pay the option writer a premium. This is first paid to the exchange, which then passes it on to the option seller. You sell call options by paying an initial margin, and not the entire sum. However, once you have paid the margin, you also have to maintain a minimum amount in your trading account or with your broker. For a buyer of a call option: For the option of a call option: Previous Chapter Next Chapter. Mobile Trading with Kotak Stock Trader View Demo Desktop Trading with KEAT ProX Call Demo. Register for our Newsletter With Minutes. Why Capital gains report? Read about the risks and returns while investing in the stock markets.
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