The Difference Between Call and Put Options

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If not for the higher margin requirements of writing options most people might have preferred writing to buying option. Also, adding to what Nik says, you may want to consider writing options when there lesser number of days to expiry as you can take the advantage of an accelarated time decay. Selling options you will be exposed to unlimited downside risk and fixed upside profit and buying options you will be exposed to unlimited profit and limited risk. One thing as a trader that is important is to do trades which you understand and which matches your trading personality.

Some traders see option shorting as high risk trades while some find it very suitable. Before employing any options strategy it is important to understand ins and out of it. You may read this link where I have explained how options work: Which is better--Selling call option or buying put option? Theoritically both look same for novice like me? You can consider buying options when there are more number of days to expiry. Both premiums would not be same.

Put premium will be less than call premium. Buy put option in earlier of the month and sell call options when you are close to the end of the month. This is because volatity Vega of the option is interrelated to time value Thetaboth gets reduced when you are nearing the end of the month.

Less volatility is good for selling options. More volatility is good for buying option since more time is there during month start, it gives ample chance for volatility effect to take place In selling option, you incur heavy margins being blocked when compared to buying options, the money which you may be interested in entering some other contracts. So you need to wait until you find a suitable time to square off your selling and get the margin money released. Shorting naked options selling call option here is accompanied by high risk, you may be thinking that you are right about the market, but the market may deceive you.

So do not enter selling options which do not have good amount of liquidity. You may not find a buyer to square off your short position atleast not at better prices what you are looking for for illiquid contracts.

You may incur huge loss if market moves against you. I am sure this will throw some light on your understanding.

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A call option , often simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option. The seller or "writer" is obligated to sell the commodity or financial instrument to the buyer if the buyer so decides. The buyer pays a fee called a premium for this right. The term "call" comes from the fact that the owner has the right to "call the stock away" from the seller. Option values vary with the value of the underlying instrument over time.

The price of the call contract must reflect the "likelihood" or chance of the call finishing in-the-money. The call contract price generally will be higher when the contract has more time to expire except in cases when a significant dividend is present and when the underlying financial instrument shows more volatility.

Determining this value is one of the central functions of financial mathematics. The most common method used is the Black—Scholes formula. Importantly, the Black-Scholes formula provides an estimate of the price of European-style options.

Adjustment to Call Option: When a call option is in-the-money i. Some of them are as follows:. Similarly if the buyer is making loss on his position i.

Trading options involves a constant monitoring of the option value, which is affected by the following factors:. Moreover, the dependence of the option value to price, volatility and time is not linear — which makes the analysis even more complex. From Wikipedia, the free encyclopedia. This article is about financial options. For call options in general, see Option law.

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