Option trading is a contract as part of which buyer of the contract gets a right to either buy or sell the underlying asset at the agreed upon strike price and within a predefined timeframe. The very name of this type of trade “option” denotes that the trader has an option but is not obligated to exercise his/her right if the trade is not in their favor.

Below is a detailed explanation of call and put options:

1.)    Call Option: In this type of option trading, buyer of the call option has a right to buy the underlying asset but there is no obligation to exercise this right. So if the value of underlying security is not performing in their favor, then they can choose to let go off of their investments.

For example: A trader buys Call option contract of a stock at $35 strike price and for 2 months and the current market price of the security is also $35.

There could be two possibilities, one is at maturity of the contract if current market price of the stock is $42 then the buyer of the contract can exercise his right and buy the stock for $35 and earn $7 of profit. May your investments be at any of the strike price, but a market price higher than the strike price will always help you gain profits. On the other side, if current price of that stock goes to $30 then the buyer is losing $5 and he/she can choose not to exercise his rights since they can buy the same stock from the market for less.

2.)    Put Option: In this case buyer of this type of option contract has a right to sell the underlying security. Further, like any other option contract if the market forces are not working in favor of the contract buyer then he/she can choose not to exercise their rights.

For example: If a trader has taken a put option position at $35 strike price. He would want the price to fall or stay below $35 so that he can stay in profits. On the other side if the market price of underlying stock goes above $35 he would rather sell his holdings in the spot market and forget about his investments and selling rights with put option.

If the market trends are predicted correctly and likewise the strike price is chosen then there are excellent possibilities to earn profits.

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