What is Call and Put ?

In the previous example we bought an option hoping that the price will go up. This type of option is called a call option.

One main reason why people like options is that they can make money both ways. if price of stock falls then also you can make money using options and when the price of the stock increases then also you can make money using options. In the last example we made money when the stock price went up.

This is the not the same for stocks when u buy them. you can only make money when stock prices increase ( we are not taking short sell into account here as most poeple dont do that )

There are different kind of options in the market to suit the investor. If you think the price of the stock will go down in future you can buy a put option which is opposite the call option.

Always Remember CALL means BUY, PUTS means SELL.

So Put option means that you can sell the share for a certain price at a certain time.

Let us take the same example here also.

Suppose current price of INFOSYS shares is Rs 2000 / share.

Now you think the price of INFOSYS share will decrease to 1500 Rs / share after 6 months.
So you buy a contract with exchange to sell 1000 Infosys Shares at 1800 Rs after six months ( such price is set by using several parameters which we will come to at later stages. ) The price of the contract is suppose 5000 rs again. So you pay 5000 rs to Exchange and buy the right to sell 1000 Infosys shares "@ 1800 / share.

1) INFOSYS bags some BIG projects and its profitability increases and revenue increases and the share price shoots up to 3000 Rs after 6 months so 1000 shares are worth 30,00,000 rs now. Now the value of the contract is 18,00,000 Lacs only so if you "exercise'' your contract you will lose money. So you dont use your option and it expires so you lose 5000 Rs


2) INFOSYS profits drop and it dosent bag any new projects and rupee rises further the price drops to 1500 Rs. So infosys Shares are worth only 15,00,000 Lacs rs If you ''exercise'' the option now you can sell Infosys Shares for 18,00,000 where as you can buy from the market for 15,00,000 Rs . So your gain is 18,00,000 - 15,00,000 Lac Rs ie 3 Lacs Rs

So from the last two posts you can figure it out the money you lose in options is the money you invested to buy those options, But your profit potential is umlimited...

So, to repeat the difference between Calls and Puts, you would buy a Call option if you expect the stock in question to go up, and you would buy Put options if you expect the stock to go down.

More posts to come...