Call and Put Options: Meaning, Types, Difference & Examples

What is Call European Option?

A Call option gives the investor/trader the right (but not obligation) to buy an underlying asset at a strike price. The quantity is bought for a premium and in a lot. 

For every option contract, there’s an expiry date on which the contract expires and becomes invalid. 

Below’s an example of the Call European index. 

Here,

• Index: BANKNIFTY
• Expiry Date: 30 Jan
• Premium: 652.80 
• One Lot Size: 15
• Strike Price: 49500

  

What is Put European Option?

A Put Option gives the holder the right to sell an underlying asset at a specific price (called the strike price). The seller (also called the writer) of a put option is obligated to buy the asset at the strike price if the buyer exercises the option.

Just like CE, there’s also an expiry date for PE on which the contract expires and becomes invalid. 

Below’s an example of the Put European index. 

Here,

• Index: BANKNIFTY
• Expiry Date: 30 Jan
• Premium: 444.00 
• One Lot Size: 15
• Strike Price: 49000

  

Now, let’s have a look at some of the important parameters that you must understand before taking a call or put position. 

Types of strike price call and put options:  

• OTM (Out-of-The-Money)

• ATM (At-The-Money)

• ITM (In-The-Money)

Let’s say that NIFTY is at Rs 20,000; now, you have different strike price options to buy. 

For CE: 

• 20,000 CE (At-The-Money)
• Less than 20,000, like ₹19,800 CE (In-The-Money), 
• More than 20,000, like ₹20,200 CE (Out-of-The-Money). 

For PE: 

• 20,000 PE (At-The-Money)
• More than 20,000 (In-The-Money), like ₹20,100 PE. 
• Less than 20,000 (Out-of-The-Money), like ₹19,900 PE. 

We have curated a detailed blog around OTM, ATM, and ITM, which you can check here. 

• Intrinsic Value: It is the difference between the underlying asset’s price and the strike price. Only "in-the-money" option has an intrinsic value. If an option is "out-of-the-money" or "at-the-money," its intrinsic value is zero.
  
  For instance,
  Underlying Asset Price (NIFTY): ₹20,500

Strike Price (In-the-money Call Option): ₹20,200
Intrinsic Value: Intrinsic Value = Underlying Asset Price - Strike Price

Intrinsic Value = ₹20,500 - ₹20,200 = ₹300. 

• Time Value: The extra amount you pay over the intrinsic value for the potential of future gains before expiration. 
• Premium: Premium is calculated using “Intrinsic Value + Time Value.” This is the upfront cost you pay to buy the option. Even if the trade goes against you, the maximum loss you’ll face is limited to this premium.

• Theta: Measures the rate at which an option loses value as it approaches expiration.

• Time/Theta Decay: Time decay refers to the reduction in the value of an option as it approaches its expiration date.

When to Use CE:

A call option is used when the underlying asset's price is expected to increase, i.e., a bullish sentiment is anticipated.

For instance, NIFTY’s current price is Rs. 20,300, and the target is Rs. 20,600. 

Technical analysis suggests an upward movement, and you buy in the money option of 20,200 for a premium of Rs. 150*25=3750

The total premium paid is ₹3,750 (excluding brokerage and other charges). 

Scenario 1) Before the expiry if NIFTY reaches the target price of ₹20,600, the intrinsic value of the call option will be:

Intrinsic Value = Target Price - Strike Price = ₹20,600 - ₹20,200 = ₹400

Since the premium paid was ₹150, your net profit per lot would be:

Net Profit = (Intrinsic Value - Premium) * Lot Size

Net Profit = (₹400 - ₹150) * 25 = ₹250 * 25 = ₹6,250

So, your total profit in this trade is ₹6,250. 

Scenario 2): If NIFTY doesn’t move up (stays at ₹20,300 or below):
If NIFTY stays below the strike price of ₹20,200, the option will expire worthless. In this case, you lose the entire premium paid, i.e., ₹3,750. 

When to Use PE:

A put option is used when the underlying asset's price is expected to decrease, i.e., a bearish sentiment is anticipated. 

Let’s say NIFTY is at ₹20,200, and based on your analysis, you expect it to fall to ₹20,000.

You buy an in-the-money (ITM) put option with a strike price of ₹20,300 at a premium of ₹150 per unit. The lot size is 25 units.

Total Premium Paid = ₹150 × 25 = ₹3,750 (excluding brokerage and other charges). 

Scenario 1: Before the expiry, If NIFTY falls to ₹20,000

If NIFTY drops to ₹20,000, the intrinsic value of the put option will be:

Intrinsic Value = Strike Price - Underlying Asset Price = ₹20,300 - ₹20,000 = ₹300

Profit per unit: 

Profit = Intrinsic Value - Premium Paid = ₹300 - ₹150 = ₹150

Total Profit = ₹150 × 25 = ₹3,750

Scenario 2: If NIFTY stays at ₹20,200 (No Movement)

If NIFTY stays at ₹20,200, the intrinsic value of the put option will be:

Intrinsic Value = ₹20,300 - ₹20,200 = ₹100

Net profit per unit:
Profit = Intrinsic Value - Premium Paid = ₹100 - ₹150 = -₹50 (Loss)

Total loss: ₹50 × 25 = ₹1,250

Scenario 3: If NIFTY moves above ₹20,300

If NIFTY remains above ₹20,300 (e.g., ₹20,350), the option will expire worthless. In this case, you lose the entire premium paid. 

Difference Between Call and Put Option

Below’s a quick head-to-head difference between the call and put option. 

Common Question Regarding Options

What are the advantages of buying options?

There are various advantages to buying options or doing option trading. 

For example, if a stock is priced at ₹2,000, purchasing a single share in equity will cost ₹2,000. However, you can buy an option for the same stock at a fraction of the cost, often as low as ₹30–₹40, depending on the time decay. 

Options are highly volatile, and their prices can move dramatically within a short period. For instance, in a bullish market, an option priced at ₹30 could jump to ₹300 in a single day. 

Options can also be used to hedge your positions in stocks. For example, you own HDFC Bank shares, and there’s news suggesting a potential decline in the stock price. To protect against this downside:

• You can buy a put option for HDFC Bank.
• If the stock price falls, the profits from the put option will help offset the losses in your stock holdings.

Conclusion

Both put and call options offer opportunities to hedge risks or profit from market movements. However, options trading carries a lot of risk; according to SEBI, 9 out of 10 individual traders in the equity futures and options (F&O) segment continue to incur losses.  

Disclaimer: This content is solely for educational purposes. The securities/investments quoted here are not recommendatory.