What is call option and put option in share market


Articles needing additional references from November All articles needing additional references. Put options are most commonly used in the stock market to protect against the decline of the price of a stock below a specified price. The potential upside is the premium received when selling the option:

If the stock falls all the way to zero bankruptcyhis loss is equal to the strike price at which he must buy the stock to cover the option minus the premium received. Retrieved from " https: In this way the buyer of the put will receive at least the strike price specified, even if the asset is currently worthless. This page was last edited on 18 Januaryat The potential upside is the premium received when selling the option:

The most obvious use of a put is as a type of insurance. The terms for exercising the option's right to sell it differ depending on option style. The put writer's total potential loss is limited to the put's strike price less the spot and premium already received. This page was last edited on 30 Marchat

The writer seller of a put is long on the underlying asset and short on the put option itself. Upon exercise, a put option is valued at K-S if it is " in-the-money ", otherwise its value is zero. Views Read Edit View history.

If the stock falls all the way to zero bankruptcyhis loss is equal to the strike price at which he must buy the stock to cover the option minus the premium received. If it does, it becomes more costly to close the position repurchase the put, sold earlierresulting in a loss. That is, the buyer wants the value of the put option to increase by a decline in the price of the underlying asset below the strike price.

Puts can be used also to limit the writer's portfolio risk and may be part of an option spread. In order to protect the put buyer from default, the put writer is required to post margin. If the buyer fails to exercise the options, then the writer keeps the option premium as a "gift" for playing the game.

A European put option allows the holder to exercise the put option for a short period of time right before expiration, while an American put option allows exercise at any time before expiration. Option values vary with the value of the underlying instrument over time. November Learn how and when to remove this template message.

The buyer pays a fee called a premium for this right. If it does, it becomes more costly to close the position repurchase the put, sold earlierresulting in a loss. If the buyer fails to exercise the options, then the writer keeps the option premium as a "gift" for playing the game. The buyer has the right to sell the stock at the strike price. The writer sells the put to collect the premium.

Another use is for speculation: The purchase of a put option is interpreted as a negative sentiment about the future value of the underlying. The graphs clearly shows the non-linear dependence of the option value to the base asset price. That is, the buyer wants the value of the put option to increase by a decline in the price of the underlying asset below the strike price.

Generally, a put option that is purchased is referred to as a long put and a put option that is sold is referred to as a short put. The buyer pays a fee called a premium for this right. The put yields a positive return only if the security price falls below the strike when the option is exercised.