The stock market is always volatile, and the conditions of the market these days are getting worse. While investors are finding new ways, option trading is becoming a more popular way for investors to depend on the future values of current securities.
Options trading is a prominent way to work on the security’s future. In this current volatile market, the worth of prediction is unmatchable. If you are able to predict the future of securities, then you can make a profit out of option trading.
Here we will focus on call and put option trading to hedge the portfolio against loss. Considerably call and put are the two available sides of options trading which depends on your predictions. In this way, you will be able to buy and sell stocks with a predetermined price, more or less than the current market value, to gain profit in the future.
Well, Roboforex will help you analyze the stock before investing in options. If you want to increase gains, you will need to take care of the options without obligation. Here we will focus on the options trading with both calls and put to strengthen your understanding of this process, including the differences.
How Does The Call Option Work?
A call option gives investors the right to purchase stocks without obligations with a designated strike price under a specific time frame or expiration date. Well, the call or investor would like to go for such a purchase only when they anticipate a huge lift in the share price of the securities.
Let’s say you are willing to trade on a stock whose price is $150 per share. Now you buy 100 shares with a strike price of $170 per share. Imagine the expiration date of six months and go forward with the no-obligation terms.
Now you have to consider the price of the call option, which, let’s say, is $15 per share, and in total, it is standing at $1500. Here the breakdown point would be $185 per share by combining call option price and strike price.
Let’s say the price of the particular stock after six months is $195. That indicates a profit of $10 per share, which makes it $1000 for 100 of the total shares which you have purchased.
How Does The Put Option Work?
Conversely, if an investor buys a sell option, they would like to go for selling the stock within the expiry date. A put option works as a selling option of the stock in advance. Here the inventor would try to sell the stock at the current market price with the determination of decreasing the market value of the particular stock in the future.
So, if the market share of the stock decreases and parallels the expectations, they would gain profit over the drop in share price.
Let’s say the current market share of a stock is $500 per share, which you think is overvalued. Now, depending on your predictions, you bought the shares for $450/share with an expiration date of three months.
Pressure the premium costs you $10 per share. The total breakeven point will be $440 per share. Now if you wait for three months and see that the share price dropped down to $400 per share, then you are making a profit of $40 per share.
What Are Option Premiums?
Options premium is the price that you pay for both calls and puts. If you want to trade with options, you have to purchase the right to trade, which is an option premium.
When you buy an option, you get the right to trade the stock’s underlying market within a specific period and price. Well, the price you pay for options premium won’t consider any obligation.
Notability, three main factors can influence options premium.
- Level of volatility.
- Viz price of the underlying contract.
- Time to expire.
Call Vs. Put Option
Let’s find out the key differences between these two!
- The main difference between call and put is that one allows you to buy, and the other allows you to sell with no obligations.
- With the call option, you will generate profit only when the price of the stock rises above the breakeven point. On the other hand, with a put option, you will gain profit only when the market price goes down more than the breakeven point.
- In a call option, the potential gain margin is unlimited, while in the put option, the share price can not be zero.