Call vs Put
Call and Put are two investment terminologies that are used frequently in stock market. For someone who is not into investment, call and put may not make any sense. But for those who are regularly buying and selling stocks, these are important words that have significance in making profits from the stock market. If you are a beginner and do not know much about call and put options, this article will make it simpler for you by highlighting the difference between call and put and how you can benefit from these options.
In investment terminology, call and put are merely options or contracts that give you the right to buy or sell a stock at a particular price in a future date. If you exercise call option, you enter into a contract with a broker that authorizes you to buy a stock at a price anticipated by you at a specified date. This price is known as strike price. If your anticipation is right and the stock prices rise more than the strike price, you have the right to get them at the strike price which is how you make profit through call option.
Let us take an example. If you entered into a contract with a broker at $5 that you would buy a company’s stock at $100 which is currently priced at $95 before the end of the month, and if the price of the stock goes up to $110, you can exercise your right and buy the stock at the strike price of $100 thus making a profit of $10 per share and can sell them at the market price of $110 thus earning a huge profit if you buy a large stock. The seller only gets $5 which is a part of the bargain. However, if the price of the stock remains below hundred at the expiry of the date of the contract, you have the option of not buying the stock, thus losing only $5 in the bargain.
On the other hand a put option is just the opposite of a call option and here you strike a bargain to sell shares at the strike price. If the prices of the share do fall below the strike price, you can buy them from the market at the prevalent prices and then sell them to the buyer at strike price thus making money. For example, if the stock is priced at $100 today and you enter into a put option with a broker saying you would sell the shares at a strike price of $95 at the end of the month. Now if the price of the stock goes down to $90 at the end of the month, you can buy the shares from the market and then sell them to the broker at a higher strike price thus making a good profit.
Call and put are called options as there is no obligation on your part to carry out the transaction and they are merely an option for you. But at the end of the specified period, you can exercise your options if they bring profit to you. The price you need to pay for an option is called its premium just as you pay premium for the insurance of your car or any other asset. In this case it is a premium for your investment.