What are the different types of options?

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Options are of two types - Call Options and Put Options

  • Call Options give you the right, but not the obligation, to buy an option contract.
  • Put Options give you the right, but not the obligation, to sell an option contract.

Example of a Call Option

You buy a call option on TCS for October at the strike price ₹2000 at a premium of ₹200 for a lot size of 100 shares. This gives you the right to buy 100 shares of TCS at ₹2000 anytime from now until the end of October. To earn this right, you pay a premium of  100 X ₹200 shares= ₹20,000. Now, if the price of the option at any time before expiry is higher than ₹2100, then you may exercise the options and earn profits. Say the option price is ₹2150. You will get-

₹150 (Strike Price- Market Price) X 200 shares= ₹30,000.

Your profits will be ₹30,000 - ₹20,000 =  ₹10,000.

In case, your option didn't do well in that period and remained below ₹2000 then you can choose to opt out. In that case, you will only lose the premium amount of ₹20,000.

Example of a Put Option

You buy a Put option on TCS at the strike price of ₹2000, at a premium of ₹100 for a lot size of 100 shares. You pay a premium of ₹100 X 100 = ₹10000 while buying the option. If the Price of TCS option remains below, then you will earn profits by selling the option. However, if the stock price remains higher than strike price then you could choose not to exercise the right and will only lose the premium.

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1 Comments

Nand Purohit
1. Nand Purohit  Nov 17, 2019 16:17 I Like It. | I Don't Like It. | Report Abuse Reply
PLEASE CORRECT THE LOT SIZES IN THE EXAMPLE OF TCS CALLS AND PUTS


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