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While there are numerous investment options available these days, one that took off by storm when launched was options trading in India. Considering their benefits such as leverage, ability to hedge, and high returns, many investors try their hand at it. Within it, there are call and put options which you can use to trade. Today, we will talk about the call option; here’s everything you need to know about them.
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A Short Guide To Call Option A Short Guide To Call Option While there are numerous investment options available these days, one that took off by storm when launched was option options s trading in India trading in India. Considering their benefits such as leverage, ability to hedge, and high returns, many investors try their hand at it. Within it, there are call and put options which you can use to trade. Today, we will talk about the call option; here’s everything you need to know about them. The Call Option The Call Option In the most basic sense, a call option is a contract wherein you the buyer have the right but not the obligation to purchase the particular commodity (derivative) at a specified price at a specified date. Now, let us try to understand this with an example. Say you are interested in buying 200 shares of Reliance Industries at INR 10 each. That makes the cost of the entire lot INR 2,000. You decide to enter into a call option with a trader (seller) which states that you will buy the 200 shares exactly one month from the day the contract is signed. You have to pay a premium for this. Say you paid INR 200 as premium. Remember, that you have the right to buy but not the obligation. Three scenarios will take place a month later: • Scenario 1: The price remains the same: So exactly, one month after you signed the contract, the cost of the 200 Reliance Industries shares remain the same. No change at all. Technically one can say, it’s not profit or loss for you. But is it? You did pay INR 200 as premium. So Loss of INR 200 here. • Scenario 2: The price rises to INR 2,500 This is advantageous to you. Why? Because while the price for the same lot in the open market is INR 2,500, thanks to the contract you entered into with the trader, you get to buy the lot for INR 2, 000. So let’s see. Original Price in contract = INR 2, 000 Premium = INR 200 So (2000+200) = INR 2,200 is total expenses incurred. Increased Price = INR 2, 500 So (2500 – 2200) = INR 300 profit.
• Scenario 3: Price falls to INR 1,500 When the price falls, it does not make sense to buy the stock especially when your total expense in INR 2,200. As you read, the call option provides the buyer with the right but not the obligation to buy the specified good at a fixed price at a fixed date. When used prudently, it can cause quite the gains.
