Call and Put Options in the Share Market
The share market offers more than just buying and selling stocks. It provides advanced tools like options trading, which can be powerful for managing risk and boosting profits. Among these tools, the two most fundamental instruments are the Call Option and the Put Option.
If you’re curious about how call and put options work, this guide will help you understand their meaning, benefits, risks, and how to use them effectively.
What Are Options in the Share Market?
Options are derivative contracts, which means they derive their value from an underlying asset (like a stock). In simple terms, they give the buyer the right—but not the obligation—to buy or sell a stock at a fixed price (called the strike price) before a certain expiry date.
There are two main types of options:
- Call Option– Right to buy
- Put Option– Right to sell
What is a Call Option?
A Call Option gives the buyer the right to buy a stock at a fixed price before the option expires. This is usually used when you expect the stock price to go up.
Example:
If Reliance is trading at ₹2,500 and you buy a Call Option with a strike price of ₹2,600 (expiring in one month), and the stock rises to ₹2,700, you can buy it at ₹2,600 and make a profit of ₹100 (minus the premium paid).
What is a Put Option?
A Put Option gives the buyer the right to sell a stock at a fixed price before expiry. This is ideal when you expect the stock price to fall.
Example:
If TCS is trading at ₹3,000 and you buy a Put Option with a strike price of ₹2,900, and the stock drops to ₹2,800, you can still sell at ₹2,900, gaining ₹100 (minus the premium).
Call vs. Put Option – Key Differences
Why Do Traders Use Call and Put Options?
- Leverage: Trade large stock positions with a small amount of capital.
- Hedging: Protect your portfolio from market declines using puts.
- Flexibility: Suitable for bullish, bearish, or sideways markets.
- Limited Risk (for buyers): If your trade fails, you only lose the premium.
How Do You Make a Profit in Options?
- Call Option Profit = Spot Price – Strike Price – Premium Paid
- g. ₹1,100 – ₹1,000 – ₹20 = ₹80
- Put Option Profit = Strike Price – Spot Price – Premium Paid
- g. ₹1,000 – ₹900 – ₹25 = ₹75
If the market doesn’t move in your favour, the maximum loss is the premium paid.
Who Participates in Options Trading?
- Buyers– Pay premium, enjoy limited risk, and gain from price movements.
- Sellers (Writers)– Earn premium income but take on higher risk.
When to Use Call and Put Options?
Popular Option Trading Strategies:
- Covered Call: Sell a call while holding the stock – earns premium income.
- Protective Put: Buy a put to protect your stock from losses.
- Straddle: Buy both a call and a put at the same strike price – profits from big moves.
- Strangle: Buy slightly out-of-the-money call and put – similar to straddle but cheaper.
Tips Before You Start Trading Options:
- Learn the Basics: Understand how options work before trading.
- Start Small: Begin with basic strategies like buying a call or put.
- Track Volatility: High volatility affects premium prices.
- Calculate Risk: Always check your maximum loss and breakeven point.
- Watch Expiry Dates: Options lose value with time (called time decay).
How to Start Trading Options in India?
- Open a Trading and Demat account with a SEBI-registered broker.
- Activate the F&O segment by submitting income proof.
- Learn to read the Option Chain (shows strike prices, premiums, etc.).
- Use tools like the NSE Option Calculator to estimate profits.
- Practice on virtual trading platforms before using real money.
Real-Life Example:
You expect Infosys (at ₹1,500) to rise.
You buy a Call Option:
- Strike Price: ₹1,550
- Premium: ₹25
- Expiry: 1 month
Outcome 1:
Stock rises to ₹1,600 → Profit = ₹25/share
Outcome 2:
Stock stays at ₹1,500 → Option expires worthless → Loss = ₹25 (premium)
Conclusion:
Understanding call and put options opens up many possibilities in the share market. Whether you’re looking to profit from price movements, hedge your portfolio, or earn a steady income, options trading offers flexible strategies. However, it also carries risk—especially for sellers—so it’s crucial to gain knowledge, practice cautiously, and manage risk wisely.
Start with small steps, build experience, and you can make options a powerful part of your trading toolkit. For more such latest updates, insights, and beginner-friendly guides on share market concepts, follow My Finance Gyan.
FAQs:
Yes, especially for sellers. Buyers have limited risk (premium only).
Yes, but they should start with basic strategies and small trades.
No, ownership of the underlying stock is not required.
A few thousand rupees per lot, depending on the stock and premium.
It depends on your market view:
- Bullish → Buy Call
- Bearish → Buy Put
- Neutral → Use advanced strategies like straddles/strangles
