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What Are the Various Types Of Options?

We've simplified the meaning and functioning of the two types of options (call and put), through an easy example.

There are two types of options contracts available in the market for traders: Call option and put option. Let us understand these two types in detail.

There are two types of options contracts available in the market for traders: Call option and Put option.

Call option

In this type of contract, the buyer has the right to buy securities at a given price, on or before a specified date. However, he is not obligated to under take the transaction. The seller is obliged to sell the securities in a call option if the buyer chooses to execute the transaction. The buyer enters into such a contract with a view of benefiting from the rise in price of the stock in future.

Here is an example of call option:

A trader purchases a call option to buy 1,000 shares of a company with strike price of Rs 300 (with the current price of the stock being Rs 280) at an option price of Rs 10 per share. Now the initial investment for the buyer is 1,000 shares X Rs 10 = Rs 10,000.

If the price of the stock goes up to Rs 320, the buyer still buys the stock at Rs 300 per share. So his net gain is:

{(320 – 300) x 1,000} - 10,000 (initial investment) = Rs 10,000

Put option

In this type of contract, the option buyer has the right, but is not obliged to sell securities to the option seller at a given price, on or before a specified date. The buyer enters into such a contract with a view to benefit from the fall in price of the stock in future. The example given below will make the concept easier to understand.

A trader purchases a put option to sell 1,000 shares of a company with a strike price of Rs 300 (current price of the stock being Rs 320) at an option price of Rs 10 per share. Now the initial investment for the buyer is 1,000 shares X Rs 10 = Rs 10,000.

If the price of the stock goes down to Rs 285, the buyer can still sell the stock at Rs 300 per share. So his net gain is:

{(300 – 285 x 1,000)} – 10,000 = Rs 5,000

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