A Guide to Call and Put Trading in Futures & Options (F&O)

Call Option:

A Call option gives the holder the right, but not the obligation, to buy a specific underlying asset at a predetermined price (strike price) within a specified time frame. This allows traders to profit from upward price movements in the underlying asset. If the price of the underlying asset rises above the strike price, the call option becomes valuable.

Put Option:

On the other hand, a Put option provides the holder with the right, but not the obligation, to sell a specific underlying asset at a predetermined strike price within a specified time frame. This enables traders to benefit from downward price movements in the underlying asset. If the price of the underlying asset falls below the strike price, the put option gains value.

Basic Trading Strategies Using Call and Put Options

Long Call Strategy:

The long call strategy involves purchasing call options in anticipation of a price rise in the underlying asset. If the asset's price exceeds the strike price before the option's expiration, traders can either exercise the option or sell it at a profit.

Long Put Strategy:

Traders implement the long put strategy when they expect the underlying asset's price to decrease. Buying put options allows them to profit if the asset's price drops below the strike price.

Covered Call Strategy:

This strategy involves holding a long position in the underlying asset while simultaneously writing (selling) a call option. Traders use this approach to generate additional income from the premium of the call option, but it also limits potential upside gains.

Protective Put Strategy:

In the protective put strategy, investors buy put options to hedge against potential losses in a long position they hold in the underlying asset. If the asset's price drops significantly, the put option's value increase helps offset the losses in the underlying position.

Straddle Strategy:

A straddle involves purchasing both a call and a put option with the same strike price and expiration date. This strategy is employed when traders anticipate a significant price movement but are unsure about the direction. Profits are generated if the price movement is substantial enough to cover the combined cost of the options.

Strangle Strategy:

Similar to the straddle, the strangle strategy involves buying out-of-the-money call and put options. Traders use this strategy when they anticipate volatility but are uncertain about the direction of the price movement. The goal is to profit from a strong move in either direction.

Underlying Asset Price:

As the price of the underlying asset moves, the value of the option can change. Call options gain value as the underlying asset's price rises, while put options become more valuable as the price falls.

Strike Price:

The difference between the strike price and the current market price affects an option's intrinsic value. In-the-money options have intrinsic value, while out-of-the-money options rely on extrinsic value.

Time to Expiration:

Options lose value as they approach their expiration date. This is due to diminishing time value.

Volatility:

Higher volatility increases the likelihood of significant price movements, which can benefit options traders. Increased volatility often leads to higher option premiums.

Interest Rates:

Changes in interest rates can influence option prices, particularly when it comes to calculating the present value of future cash flows.

Hedging:

Activities can create arbitrage opportunities. Arbitrageurs exploit price discrepancies between the underlying asset and its corresponding derivative contracts. If these discrepancies arise due to hedging activities, arbitrageurs can take advantage of them, which could potentially lead to price convergence between the two markets.