In the context of options contracts, puts and calls refer to two different types of options that give the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price within a predetermined period.
1.
Put Option: A
put option is a contract that gives the holder the right to sell the underlying
asset at a predetermined price (known as the strike price) on or before a specified
date (Known as the expiration date). Put options are typically used by traders
who anticipate a decline in the price of the underlying asset. If the rice of
the asset falls below the strike price, the put option becomes valuable,
allowing the holder to sell the asset at a higher price. If the price remains above
the strike price, the put option may expire worthless, and the holder would not
exercise the option.
2.
Call Option: A
call option, on the other hand, is a contract that gives the holder the right
to buy the underlying asset at a predetermined price (strike price) on or
before the expiration date. Call options are usually used by traders who
anticipate an increase in the price of the underlying asset. If the price of
the asset rises above the strike price, the call option becomes valuable,
enabling the holder to buy the asset at a lower price. If the price remains
below the strike price, the call option may expire worthless, and the holder
would not exercise the option.
Both
put and call options have several important components:
Strike
Price: The price at which the underlying asset can be bought or sold if the
option is exercised.
Expiration
date: The date at which the option contract expires and becomes invalid.
Premium:
The price paid by the option buyer to the option seller for the right to buy or
sell the asset. It represents the cost of the option contract.
Option
Buyer (Holder): The individual or entity
that purchases the option and holds the right to exercise it.
Option
Seller (Writer): The individual or entity that sells the option and is
obligated to fulfill the terms of the contract if the option buyer decides to exercise
it.
Options,
including puts and calls, are widely used in financial markets for various
purposes including speculation, hedging and risk management. Traders and
investors analyze market conditions and use these options strategically to
potentially profit from price movements or protect their existing positions.