The share market is full of investment options to help the investors earn a profit when there are sudden fluctuations. Options are one of the significant categories of the derivative securities which act as a contract between the parties where one of them has the ultimate right to trade the underlying asset at a specific price either before or on a given date. These are classified into two types including the call option which is related to buying the stock and put option which is related to the selling.
When we talk about the call option, in particular, it is defined as a derivative contract that exists between the seller and buyer where the latter is given the right to purchase an underlying asset on a certain date at the strike price. The moment you buy a call option, you get the right to purchase a stock on or before a given date in the future at a specific price. Moreover, you would also need to pay a certain amount in the form of premium. Almost all the instruments of the stock market including the bond, currency, stock, and others are covered under the call option. Under this option, if the buyer wishes to buy a stock, the seller is compelled to sell the stock at the price which was earlier agreed upon between the parties.
The put option, on the other hand, is a complete reverse of the call option where the seller is compelled to purchase a financial instrument if the buyer chooses the right to sell the underlying asset. To earn this right, the buyer needs to pay a certain premium price beforehand.
Some of the key differences between the call and put option are as follows:
- The put option allows selling of the financial instrument while on the other hand, the call option calls for buying it.
- You earn money in the call option when the price of the underlying asset rises while on the other hand in the put option the money is generated when the price of the security falls.
- The profits that you earn with the call option are unlimited while, on the other hand, these are limited in the case of a put option.
- The investor usually looks for the prices to go down in the case of the put option while in the call option prices are considered when the market is up.
- In the case of the call option, the buyer can buy an asset at the strike price on the given date and is not obligated to make such an amendment. When it comes to the put option, the buyer can sell the security on a given date at a specific strike price and is not obligated the right in return.
- In the call options, the buyer aims to earn a profit by buying the stock for a price lesser than the rising value. Moreover, the seller also hopes to earn profit through the declining stock prices. On the flip side, with the put options, it is expected by the buyer that this option would eventually expire when the stock price is above the strike price.
Both of the call options or the put options have certain different characteristics associated with them when it comes to buying or selling the financial instruments to make a profit. Hope that the differences listed above would help you understand these two terms better. You can choose any of these options according to your requirements and preferably should consult an investor before you take any major step.