{"id":7960,"date":"2023-05-18T10:53:51","date_gmt":"2023-05-18T05:23:51","guid":{"rendered":"https:\/\/razorpay.com\/learn\/?p=7960"},"modified":"2023-05-18T10:53:51","modified_gmt":"2023-05-18T05:23:51","slug":"call-and-put-option","status":"publish","type":"post","link":"https:\/\/razorpay.com\/learn\/business-banking\/call-and-put-option\/","title":{"rendered":"A Beginner\u2019s Guide to Understanding Call and Put Option"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">Call and put options refer to the derivatives or financial contracts under which buyers have the right to purchase and sell an underlying asset. This asset can be a commodity, stock, bond etc., bought or sold within a certain date or strike price. Here, buyers only have a right and not an obligation to do so.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">These options do not have a worth of their own and derive value from those of underlying assets.\u00a0 As both these options are buyer\u2019s rights and not their obligations, hence these are regarded as asymmetrical options.\u00a0<\/span><\/p>\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_80 counter-hierarchy ez-toc-counter ez-toc-transparent ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69e00889a7361\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69e00889a7361\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/call-and-put-option\/#Difference-Between-Call-and-Put-Option\" >Difference Between Call and Put Option<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/call-and-put-option\/#What-are-Option-Premiums\" >What are Option Premiums?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/call-and-put-option\/#How-Do-Call-Options-Work\" >How Do Call Options Work?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/call-and-put-option\/#How-to-Calculate-Call-Option-Payoffs\" >How to Calculate Call Option Payoffs?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/call-and-put-option\/#How-Do-Put-Options-Work\" >How Do Put Options Work?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/call-and-put-option\/#How-to-Calculate-Put-Option-Payoffs\" >How to Calculate Put Option Payoffs?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/call-and-put-option\/#How-Small-Business-Can-Benefit-from-RazorpayX-Offerings\" >How Small Business Can Benefit from RazorpayX Offerings?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/call-and-put-option\/#Frequently-Asked-Questions\" >Frequently Asked Questions<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"Difference-Between-Call-and-Put-Option\"><\/span><b>Difference Between Call and Put Option<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Definition:<\/b><span style=\"font-weight: 400;\"> The main difference between a call and a put option is that one deals with buying an asset and the latter deals with selling an underlying asset.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Reason:<\/b><span style=\"font-weight: 400;\"> Buyers of call options anticipate that stock prices will rise. Conversely, buyers of the put option expect the stock price will fall.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Right &amp; Obligation:<\/b><span style=\"font-weight: 400;\"> The call option indicates the right of a buyer to buy an underlying asset at a fixed price at a future date. The price at which they will buy is pre-defined and is determined today. In contrast, the put option refers to the right of selling an asset at a future date, this price is again decided today. However, after selling, the seller falls under the obligation to purchase an asset if its buyer exercises his\/her option.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Future View:<\/b><span style=\"font-weight: 400;\"> Traders who opt for a call option at the strike price have a negative view that the stock price will stay less than its strike price. The selling of this call option will lead to a break-even for sellers as they will get the strike price plus the premium fee.\u00a0<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">However, for sellers of put options, they have a view that the stock price will stay above its strike price. Here, a break-even is the difference between the option\u2019s strike price and its premium received.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Chances of Profit:<\/b><span style=\"font-weight: 400;\"> Opting for a call option will result in higher profit only if the value of the contract or underlying asset is increasing. In contrast, holders can ensure profit from a put option only if their underlying asset\u2019s value is decreasing or falling.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Percentage of Potential Gain:<\/b><span style=\"font-weight: 400;\"> Potential gain in a call option is unlimited as there is no mathematical limitation in the underlying asset&#8217;s rising price. However, the potential gain in a put option has a limit as the price of an underlying asset can technically never be zero.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Meaning of \u2018in-the-money\u2019 &amp; \u2018out-of-the-money\u2019:<\/b> <span style=\"font-weight: 400;\">Call and put option involves in-the-money or out-of-the-money scenarios. <\/span><span style=\"font-weight: 400;\">If the spot price of a call option is higher than that of its strike price, it is referred to as in-the-money.<\/span> <span style=\"font-weight: 400;\">In case a call option&#8217;s spot price is less than that of its strike price, it is referred to as out-of-the-money.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Conversely, under a put option, in-the-money is termed when spot prices are less than strike prices. However, when the spot price of an underlying asset exceeds its strike price, it is an out-of-the-money put option.\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Effect on its Value:<\/b><span style=\"font-weight: 400;\"> As the data of dividend nears, there is a loss of value of the call option. However, in the case of a put option, its value increases.\u00a0<\/span><\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"What-are-Option-Premiums\"><\/span><b>What are Option Premiums?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Options premiums refer to the amount that traders have to pay for a put or a call option. In other words, it is the cost that they have to bear for exercising this right.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Three factors namely volatility level, underlying contract and expiry time influence the option premium. Mathematically, the option premium can be evaluated as the sum of the option&#8217;s time value and the option&#8217;s intrinsic value.\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"How-Do-Call-Options-Work\"><\/span><b>How Do Call Options Work?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Investors opt for a call option only when they see that the underlying asset&#8217;s price has increased.\u00a0 This particular contract is formulated based on a securities exchange. In this option, the seller conducts a transaction with option buyers where the seller gives a right (not obligation) to buyers to obtain a particular security at a certain price.\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"How-to-Calculate-Call-Option-Payoffs\"><\/span><b>How to Calculate Call Option Payoffs?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">In a call option, payoffs are the profit or loss that option buyers or sellers earn. The strike price, expiry date and premium are variables depending on which computation of call options takes place. Even these variables help evaluate call option payoffs.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Formulas that are used for computing payoff and profit amount for call option buyers are-<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Payoff<\/span> <span style=\"font-weight: 400;\">= Spot Price \u2013 Strike Price<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Profit = Payoff \u2013 Premium Paid<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Formulas used for a payoff for call options for sellers are-\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Payoff<\/span> <span style=\"font-weight: 400;\">= Spot price \u2013 Strike Price<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Profit = Payoff + Premium Paid<\/span><\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"How-Do-Put-Options-Work\"><\/span><b>How Do Put Options Work?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Several ways are there using which investors can complete or close options trade. So, in case an option expires profitable, investors can exercise it. In case an option proves unprofitable, then its investor loses the money used to pay the option.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This put option carries chances of ensuring higher value which is indicative that the put option premium increases as an underlying stock price falls and vice versa. In addition, the put option, when exercised, extends investors a selling position in a stock. Hence, this option helps safeguard investors from downward moves in a long stock position.\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"How-to-Calculate-Put-Option-Payoffs\"><\/span><b>How to Calculate Put Option Payoffs?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">In the case of payoffs for put option buyers, the buyer&#8217;s profit or loss on the option is based on its underlying asset&#8217;s spot price.\u00a0 If the spot price is lower than its strike price when it expires, then buyers will benefit from massive profit.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Now in case of payoff for put option sellers, the seller levies a premium fee. Here, the profit or loss is based on its spot price. So, the amount of profit that the buyers make is equivalent to the loss that the seller incurs.\u00a0\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"How-Small-Business-Can-Benefit-from-RazorpayX-Offerings\"><\/span><b>How Small Business Can Benefit from RazorpayX Offerings?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><a href=\"https:\/\/razorpay.com\/x\/\"><span style=\"font-weight: 400;\">RazorpayX<\/span><\/a><span style=\"font-weight: 400;\"> supercharges business baking, thus making it handy for small businesses and startup-ups in several regards. This platform uses integrated automated systems and helps in resolving all the banking needs of a business body.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">With the help of this emerging business banking platform, businesses can now easily access RazorpayX-powered <\/span><a href=\"https:\/\/razorpay.com\/x\/current-accounts\/\"><span style=\"font-weight: 400;\">current account<\/span><\/a><span style=\"font-weight: 400;\">s, automate payroll compliance, supercharge pay-outs, apply for loans, pay taxes etc., from a single dashboard.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In addition, small businesses can opt for the <\/span><a href=\"https:\/\/razorpay.com\/x\/forex\/\"><span style=\"font-weight: 400;\">Forex funding facility<\/span><\/a><span style=\"font-weight: 400;\">. It will help them gather foreign capital in India under expert assistance. Even the team of forex experts will help offer a view on forex rates, RBI guidelines and filings.<\/span><\/p>\n<p><a style=\"border-radius: 3px; background: #528FF0; padding: 15px; font-weight: 600; cursor: pointer; text-decoration: none; color: white;\" href=\"https:\/\/razorpay.com\/x\/current-accounts\/?r=blog_cta_call_and_put_option\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\">Sign up for RazorpayX-powered Current Account<\/a><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Frequently-Asked-Questions\"><\/span>Frequently Asked Questions<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\t\t\t<div id=\"rank-math-rich-snippet-wrapper\" class=\"\">\n\n\t\t\t\t\n\t\t\t<\/div>\n\t\t\n","protected":false},"excerpt":{"rendered":"<p>Call and put options refer to the derivatives or financial contracts under which buyers have the right to purchase and sell an underlying asset. This asset can be a commodity, stock, bond etc., bought or sold within a certain date or strike price. Here, buyers only have a right and not an obligation to do<\/p>\n","protected":false},"author":151156539,"featured_media":7962,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3437],"tags":[],"class_list":{"0":"post-7960","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-banking"},"_links":{"self":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/7960","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/users\/151156539"}],"replies":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/comments?post=7960"}],"version-history":[{"count":2,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/7960\/revisions"}],"predecessor-version":[{"id":7963,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/7960\/revisions\/7963"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/media\/7962"}],"wp:attachment":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/media?parent=7960"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/categories?post=7960"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/tags?post=7960"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}