Differences Between Call and Put Options
The terminologies of call and put are associated with the option contracts. An option contract is a form of a contract or a provision which allows the option holder the right but not an obligation to execute a specific transaction with the counterparty (option issuer or option writer) as per the terms and conditions stated. An option is considered as a derivative contract since its value is derived from an underlying security.
Call Option vs. Put Option Infographics
Key Differences Between Call and Put Options
- The buyer of a call option has the right but is not necessarily obligated to buy a pre-decided quantity at a certain futuristic date (expiration date) for a certain strike price. Conversely, put options will empower the buyer with the right to sell the underlying security for the strike price at a futuristic date for a pre-determined quantity. However, they are not obligated for the same.
- A call option permits the buying of an option, whereas a put will permit the selling of an option.
- The call option generates money when the value of the underlying asset is rising upwards, whereas the put option will extract money when the value of the underlying is falling.
- As a continuation of the above, the potential gain in a call option is unlimited due to no mathematical limitation in the rising price of any underlying, whereas the potential gain in a put option will mathematically be restricted.
- Despite being bound by a single contract, the investor of a call option will look for a rise in the price of a security. Conversely, in the put option, the investor expects the stock price to fall down.
- Both options can be In the Money or Out of the Money. In the case of the call option, the underlying asset price is above the strike price of the call. Out of the money indicates the underlying asset price is below the call strike price. Another aspect is ‘At the Money,’ meaning strike price and underlying assetUnderlying AssetUnderlying assets are the actual financial assets on which the financial derivatives rely. Thus, any change in the value of a derivative reflects the price fluctuation of its underlying asset. Such assets comprise stocks, commodities, market indices, bonds, currencies and interest rates. price is the same. The premium amount will be higher for the ‘In the Money option’ since it has an intrinsic value whilst the premium is lower for Out of the Money call optionsOut Of The Money Call Options”Out of the money” is the term used in options trading & can be described as an option contract that has no intrinsic value if exercised today. In simple terms, such options trade below the value of an underlying asset and therefore, only have time value..
With respect to put options, In the Money indicates underlying asset price below the strike price. Out of the Money is when the underlying asset price is above the put price. The premium amount for the ‘In the Money’ option will be higher but the expectation of ‘in the money’ is opposite to what it was in the call option.
- Buying a call option requires the buyer to pay a premium to the seller of the call option. However, no margin has to be deposited with the stock exchange. However, selling a put requires the seller to deposit margin money with the stock exchangeStock ExchangeStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ., which offers the advantage to pocket the premium amount on the put option.
Also, have a look at Option Trading StrategiesOption Trading StrategiesOptions Trading refers to a situation where the trader can purchase or sell a security at a particular rate within a specific period. Its strategies include Long Call Options, Short Call Options, Long Put Options, Short Put Options, Long Straddle Options, & Short Straddle Options etc. .
|Basis for Comparison||Call Option||Put Option|
|Meaning||It offers the right but not obligation to buy the underlying asset at a particular date for the pre-decided strike price.||It offers the right but not the obligation for selling the underlying asset at a particular date for the pre-decided strike price.|
|Investor Expectations||The rise in the Prices||Fall in the prices|
|Profitability||The gains can be unlimited since the price rise cannot be capped||Gains are limited since the price can fall steadily but will stop at Zero.|
|Permits||Buying the stock||Selling of Stock|
|Analogies||Considered a security deposit allowing taking a product at a certain fixed price.||It is like an Insurance offering protection against a loss in value.|
Entering into a call or put option is an entire game of speculation. If one has trust in the movement of the price of the underlying asset and is ready to invest some money with an appetite to bear the risk of premium amount, the gains can be substantially large. In terms of the Indian options market, a contract expires on the last Thursday of the month before which the contract should be executed. Else contracts can be allowed to expire worthless with the premium amount foregone.
Thus, it completely depends on the risk appetite of the investor and the faith in the direction of the price movement of the underlying asset for which the option contract is undertaken. Call and put options are two exactly opposite terms, and a combination of speculation and financial ability will help in extracting maximum financial gains.
Call Options vs. Put Options Video
This has been a guide to a Call Options vs. Put Options. Here we discuss the top differences between call and put option along with a comparative table and infographics. You may have a look at below suggested readings to enhance your knowledge of derivatives.