Call Option vs Put Option

Difference Between Call Option vs Put Option

Option as the word itself says it’s not a compulsion. It is a contract between a person who buys and a person who sells. It gives the buyer right (not obligation) to buy (A call option) or sell (A put option) at a fixed rate at a fixed period. Example- Ticket of a match. It is a derivative product that derives its value from the underlying.

Any options have the following:

Option holder/buyer – This gives the option holder or a buyer right to buy or sell an underlying asset (stock or index), Option writer/seller – This gives the obligation to sell or buy if exercised, Exercise/Strike price- Price at which the stock or index is traded in the market, Expiry date- date at which the options become invalid, Premium- Purchase price of an option.

Options are a type of derivatives product that gives investors the right but not the obligation to trade securities or any bonds. In options the one who buys always pays the premium and one who sells always receives the premium. In layman language just think of call options as a bet that the stock or the index price will go up and if you feel that the stocks and index will go down then it is our options.

Head to Head comparison between Call Option vs Put Option(Infographics)

Below are the top 10 differences between the Call Option and Put Option

Key Differences between Call Option vs Put Option

Let us discuss the key differences given below:

1. Call option: A derivative instrument that gives the option holder(buyer) the right to buy the underlying asset at a particular price which is fixed(strike) for that particular time frame (expiration date). Put option: in a similar way has a right to sell the obligation for the strike price at a futuristic date. The main thing is both are not obliged to do the same.
2. A call option allows you to buy an option and put option allows you to sell the option.
3. Profit is earned in a call option when the asset increases its price and when you are assuming a bullish trend. Profit is earned in the market for put options when you are assuming a bearish trend i.e. when the value of the underlying increases the call option earns profit whereas when the value of underlying decreases put option earns a profit.
4. As stated above when the price increases of the underlying in a call option a person earns and there is no upper limit of increase in the price for underlying, therefore, there is an unlimited profit for a call option. Due to no limitation in the rising price gain in the call option is unlimited. In a put option, there is a limited and maximum profit earned is the difference between strike and premium.
5. The investor expects the price of the security to go up in a call option and in a put option investors expect the price of underlying to go down.
6. Both the call and put options can be In the money or Out of Money. Below stated examples will show the elation between strike and market price.
7. Buying a call option means the buyer needs to pay a premium to the seller. No margin is necessary However selling a put option requires the seller to deposit margin money with the stock exchange
8. Both call and put options react differently to the change of the underlying assets. Greek is known as ‘Delta’ is used to note the changes in the value of the option when the value of underlying assets changes. Call options are said to have positive deltas that mean there is an increase in the value of the increase of the underlying asset.
9. Both call and put option react in opposite ways with the change in the interest rates. Greek known as ‘Rho’ is used to measure the changes. The call option increases its value with an increase in the interest rates. Put option decreases its value with an increase in the interest rates.
10. A call option is said to lose its value as the dividend date comes near. Put value, however, increases its value as the dividend date reaches.

Call Option vs Put Option Comparison Table

Let’s discuss the top comparison below:

One can understand the difference between them by the following example:

Example: If you want to buy gold which is trading at Rs3500 per gram. You purchase a call option on it for Rs3500 as your strike price and premium as Rs3 per contract. The cost of the option (premium) considering you are purchasing 100 as the lot size so it is 100*3= Rs300. Let’s consider the scenario that can take place the next day.

Scenario 1: Suppose gold is trading at Rs 4000 per gram the next day but the option buyer already has a right to purchase at Rs3500/gm. The worth of the option would be the value at Rs50/gram. For 100 lot size, the worth of the option would be 50*100= Rs5000. So, the net profit would be 5000-300(amount paid to purchase the premium) = RS 4700. So the net profit is Rs4200. The option is called the money market (market price is more than the strike price)

Scenario 2: Suppose gold is trading at the same price of RS 3500/ gm. There is no change in the price. The option would be worth 0 but we have already paid a premium of RS 300. Even if we execute or don’t as the price is the same there won’t be any change. Therefore, the net profit is (-Rs300) which is the premium paid. The option is called as at the money market ( market price is equal to strike price)

Scenario 3:Suppose gold is trading at price Rs 3000/gm (Less valuable than the exercise price) You won’t execute the option because you had a right to execute at RS 3500, price in the market is Rs3000/gm. Without exercising the option goes worthless. Because we have an option to execute or not in options derivatives. Net profit is (-Rs300). The option is called as out of the money market (market price is less than the strike price)

Conclusion

Both Put and call options to protect the investors and also has the potential for making huge money but both can turn out to be bad if not used properly. Entering a call or put option is an entire game of speculations. It completely depends on risk appetite to the investor whether it is the risk-averse and risk-taking person. Call option and put option are two opposite terms used in speculation and financial ability.

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