So many of us want to learn Options Trading but do not understand the concept of ‘Calls’ and ‘Puts’. I have tried to explain in layman’s language how to understand them.
The reason is we get too much into technical details of terms like Strike price, At the money, Out of the Money, Delta, Theta, Gamma and many many more. Understanding all this is important but not without understanding the basics first. Lets ignore all these terms and understand the basics first.
Take an example of land prices. If you wish to buy land expecting it to go up, you have to pay the entire amount
( Land size X Rate per unit ).
Suppose you are told that you need not pay the entire amount but pay a small premium and book the land.
If the land price moves up, the premium price will also move up and you can sell the premium and exit.
Buying a Call works in the same way.
|Current price 2500|
Lets suppose you expect the share price of Reliance Industries to go up. If it is trading at 2500 now and you expect it to go to 2800, what do you do?
You check the price of the Call price of 2800 and you buy it. In this case it is 52. So you need to invest
250 X 52
Where 250 is the minimum Lot size of Reliance.
If you expect it to go down to 2200, What do you do?
you check the Put price of 2200. In this case it is at 45.So you need to invest
250 X 45
So you buy a Call when you are bullish (positive) and you buy a Put when you are bearish (negative)
When do you make money?
When your judgement comes true.
So if Reliance share price moves up, so will your Call price.
And if Reliance price moves down, your Put price will increase (This is where most tend to get confused)
Thats how simple it is.
In short – Buy a Call when Bullish
Buy a Put when Bearish
There is a time limit
But this has to be done within a time limit. That is – the trades have to be closed within a weekly or monthly time period.
That day is called ‘Expiry’ day. There is weekly expiry every Thursday and a Monthly expiry every month end.
Please note – Do not take investment decisions immediately based on the above information. There are other important points to be taken into consideration like Option selling, Time value, Implied Volatility, Premium decay etc. which we will understand in future blogs.