CMA Study Group

Help in call and put options

  • 1.  Help in call and put options

    Posted 16 days ago
    Dear mates, 

    Although i have been able to know the basic of call and put option but i need help from someone to make me understand this topic in depth. 
    If someone wants to revise it and in the process explain me the topic, i would be grateful. 

    Thank you
    --
    Sincerely,
    Shreyash Mohan Das,
    4th Semester,
    2C BBA2018179


  • 2.  RE: Help in call and put options

    Posted 14 days ago
    Hi Shreyansh

    Try to come up with a question. so that we can help u on that and further concepts

    ------------------------------
    Mohammed Nadeem
    Accountant
    Vi Sigma Apparel Group FZE
    Abu Dhabi
    United Arab Emirates
    ------------------------------



  • 3.  RE: Help in call and put options

    Posted 13 days ago
    Hey Shreyash,

    Options are derivatives and derivatives are essentially a contract to act in future at a price fixed today. The unique aspect of options is that by paying a premium today, you get the right to choose whether you want to execute the contract or not.

    First, it's important to note that there are 2 parties to an option contract: buyer and seller. Buyer always pays the premium and thus shall have a right and the seller always receives the premium and thus shall have an obligation.

    Second, there are 2 types of options: call and put. Which type of option you use depends on whether to buy an asset or sell the same. If you are interested in buying an asset, you should use a call option (right to buy) and if you are interested in selling an asset, you shall use an put (right to sell) option.

    Call option: you buy a European call option on shares of company ABC with an exercise price of $50 at a premium of $2 which expires in 1 year.
     
    Buyer of call: now by paying a premium of $2, you have the right to buy the ABC shares at $50 at the end of 1 year. So if at the end of one year, if the shares of ABC are trading above 50, you shall still have the right to buy at 50. If on the other hand, the shares of ABC are trading below 50, you shall let the option expire (not use it). Benefits from the increase in share price.

    Seller of call: receives the premium and thus has the obligation to sell the shares at 50 even if the market price is above 50.  Benefits from the decrease in share price.

    Put option: you buy a European put option on shares of company ABC with an exercise price of $50 at a premium of $2 which expires in 1 year.

    Buyer of put: now by paying a premium of $2, you have the right to sell the ABC shares at $50 at the end of 1 year. So if at the end of one year, if the shares of ABC are trading below 50, you shall still have the right to sell at 50. If on the other hand, the shares of ABC are trading above 50, you shall let the option expire (not use it). Benefits from the decrease in share price.

    Seller of put: receives the premium and thus has the obligation to buy the shares at 50 even if the market price is below 50.  Benefits from the increase in share price.  

    Now an important point that most people get wrong: i. Buying a call is not the same as selling the put ii. Buying a put is not the same as selling a call. This is because buying (pay premium) results in a right and selling (receiving premium) results in an obligation.  

    Regards

    Vishal