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How do I use Call And Put Option

09 Jun 2023

Introduction

  • Trading in futures and options enables investors to profit from price movements in various financial markets. 
  • Call and put options are two essential tools that allow traders to take advantage of market fluctuations while managing risk. 
  • Here, we will delve into the fundamentals of call and put options.
  • We will also learn how to utilize them effectively on the Motilal Oswal trading platform.

What are Call Options?

  • A call option is like a ticket that allows you to buy an asset at a specific price within a set timeframe.
  • You are not obligated to buy, but if you think the asset's price will go up, you can use the option to purchase it at a lower price and make a profit from the difference.
  • It's a way to take advantage of potential price increases without committing to buying the asset outright.
  • For example, you believe that the price of a particular stock will increase in the near future. In such a case, you can use the Motilal Oswal trading platform to buy a call option for that stock, specifying the strike price and the expiration date. If the stock price indeed rises above the strike price by the expiration date, you can exercise the call option and profit from the price difference.

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What are Put Options?

  • A put option grants the holder the right but not the obligation to sell an underlying asset at a specific, predetermined price within a specific time frame. 
  • Traders usually purchase put options when they expect the price of the underlying asset to decrease.
  • This allows them to sell the asset at a higher price than its market value.
  • Suppose you have a bearish outlook on a particular stock and expect its price to go down. In such a case, you can purchase a put option for that stock, setting the strike price and the expiration date. The Motilal Oswal trading platform is extremely useful for this purpose. If the stock price falls below the strike price by the expiration date, you can exercise the put option and profit from the price difference.

How to Manage Risk and Enhance Strategies?

  • In futures and options trading, call and put options not only offer opportunities for potential profits but also serve as risk management tools.
  • By purchasing options, traders limit their risk to the premium paid for the contracts, as they are not obligated to exercise the options if market conditions are not favourable.
  • Moreover, call and put options can be used in combination with other trading strategies to enhance risk-reward profiles.
  • For example, traders may employ strategies such as spreads, straddles, or collars, which involve simultaneously buying and selling multiple call and put options to capitalize on anticipated market movements and hedge against potential losses.

What are the Key Considerations?

While call-and-put options provide flexibility and potential profits, it is essential to consider certain factors before engaging in options trading. Keeping these considerations in mind helps to invest better and also mitigate risks. These include understanding the underlying asset, evaluating market conditions, conducting thorough research, and effectively managing risk.

Conclusion

  • To sum up, call-and-put options are valuable tools in futures and options trading.
  • They enable traders to take advantage of price movements in various financial markets. 
  • You can benefit from these powerful tools by learning the basics of call and put options and utilizing the Motilal Oswal trading platform. These tools also help enhance your trading strategies and help you achieve your financial goals. 
  • Remember that it's important to conduct thorough research, stay updated on market trends, and develop a disciplined trading approach to optimize your success.

 

Related Articles: All about options trading in commodities | 7 Best Bearish Options Trading Strategies

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