Understanding Call Options in the Indian Stock Market
In the third installment of our Future and Option series, we delve into the intricacies of call options. This comprehensive guide not only explains the concept of call options but also provides insights into executing call option transactions on platforms like Upstox, with a note that the process remains similar across other brokers such as Zerodha and Fyers. A Malayalam video link is also included. Check below the post.
What is a Call Option?
An option serves as a valuable tool for safeguarding positions and mitigating risks. In the context of call options, the buyer is endowed with the right, while the seller carries the obligation to make a delivery. Commonly referred to as the option writer, the seller relinquishes this right. The initiation of an agreement involves the payment of a 'premium' by the buyer to the seller, with a pre-specified price called the 'Strike Price.' The buyer stands to benefit only if the asset's price exceeds the strike price.
If the asset's price remains at or below the strike, the buyer gains no advantage. Hence, it is advisable to opt for buying options when anticipating an increase in price. Statistically, the option seller, or writer, holds higher odds of success in a typical option contract. However, the directional forecast must materialize before the expiry date; otherwise, the option becomes worthless.
Buying Call Options
When anticipating a rise in the underlying price, becoming a buyer of a call option makes strategic sense. A stagnant or decreasing underlying price, however, results in financial losses for the buyer equivalent to the premium paid to the option seller. The maximum loss for the call option buyer is limited to the premium paid, and this loss persists as long as the spot price remains below the strike price.
While the potential for profits for the call option buyer is theoretically unlimited, it's essential to recover the paid premium first. The breakeven point, the level at which the call option buyer recovers the premium, marks the initiation of actual profits. Profits are realized only beyond the breakeven point, which inherently lies above the strike price.
Selling/Writing a Call Option
Contrary to buying, selling a call option reflects a bearish sentiment toward a stock. The P&L behavior for the call option buyer and seller is symmetrically opposite. As the call option seller, you receive a premium but are required to deposit a margin.
While the profit for selling a call option is limited to the received premium, the potential loss is theoretically unlimited. Understanding the dynamics and risks associated with selling a call option is crucial for making informed investment decisions.
Step by step guide on how to buy call option in Upstox
Today I will explain how to buy a call option on a stock using the Upstox platform. Similar to put options, call options give you the right but not the obligation to buy a stock at a predetermined "strike" price before an expiration date. They allow you to profit if you think a stock price is going to rise.
If you don't have an upstox account, you can open with this link - Upstox
Here is a step-by-step guide to buying a call option on Upstox:
Log in to your Upstox trading account
Search for the stock you want to trade options on using the search bar or from the stock quotes list
Click on the "Derivatives" tab above the stock's price chart
From the drop-down menus, select the call option you want based on: a) Expiry date - This is the date the option expires b) Strike price - The price at which you can buy the stock
Enter the quantity (number of contracts). Each contract is for a fixed number of shares.
The premium price for purchasing the contracts will populate automatically.
Review the order details carefully - stock symbol, option expiry, strike price, and total premium amount.
Click the "Buy" button to place the order just like buying a stock.
Once the order is filled, you now hold call option contracts giving you the right to buy the stock at the set strike price before the selected expiry date.
Let me know if any part of the sequence needs clarification! Buying call options may seem intimidating but just requires going through the systematic order placement process.
Check out this video about call option in Malayalam - https://youtu.be/9M-dTukcGe8?si=2UJSJZKqT1nHVWbm
Frequently Asked Questions
Q1: Can you explain the breakeven point for a call option buyer?
The breakeven point is the spot price at which the call option buyer recovers the premium paid. Beyond this point, the buyer starts making a profit.
Q2: What is the primary difference between buying and selling call options?
Buying call options is advantageous when expecting a price increase, while selling is suitable for a bearish outlook. The profit and loss behaviors for buyers and sellers are opposite.
Q3: Are the processes for buying call options similar across different brokers?
Yes, the process for buying call options is generally similar across various brokers, such as Upstox, Zerodha, and Fyers. The nuances may vary, but the fundamental steps remain consistent.
Check video in our youtube channel for more information in Malayalam.
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