The buyer of a call has purchased the right to buy and for that he pays a premium.
Now let us see how one can profit from buying an option. Rahul purchases a December call option at Rs. 40 for a premium of Rs. 15. That is he has purchased the right to buy that share for Rs. 40 in December. If the stock rises above rs. 55 (40+15) he will break even and he will start making a profit. Suppose the stock does not rise and instead falls he will choose not to exercise the option and forego the premium of Rs. 15 and thus limiting his loss to Rs 15.
A Put option gives the holder of the right to sell a specific number of shares of an agreed security at a fixed price for a period of time. eg. Now Rahul purchases 1 Reliance mar 3500 put at premium 200. This contract allows Rahul to sell 100 shares of Reliance at Rs 3500 per share at any time between the current date and the end of mar. To have this privilege Rahul pays a premium of Rs 20000 (Rs 200 a share for 100 shares)
The buyer of a put has purchased a right to sell. The owner of a put option has right to sell.
Call Options - long and short positions When you expect prices to rise, then you take a long position by buying calls. you are bullish. When you expect prices to fall, then you take a short position by selling calls. You are bearish.
Put Options - long and short positions When you expect prices to fall, then you take a long position by buying puts. You are bearish. When you expect prices to rise, then you take a short position be selling puts. You are bullish.
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