This short video explains in simple terms how to buy a call and put option in a Futures Contract in Options Trading.

This short video explains in simple terms how to buy a call and put option in a Futures Contract in Options Trading.

In an options contract, there is no obligation on the buyer or seller to buy or sell before the date of expiry.

A call option in Options Trading gives the right to buy whereas a put options gives the options trader the right to sell.

Let us take an example of trading in stock futures, Suppose a stock currently sells at Rs. 3000 but you feel it is undervalued and the stock price might rise in the future.

Hence you buy a call option of that stock and pay a premium of Rs. 300 over the Rs. 3000 to the seller. If the stock price falls or remains the same, then the call option buyer will have a loss of Rs. 300, which is the premium paid. he may not exercise the option and ignore the contract. If the price of the stock increases to 3500 in the future, then the call option buyer will have a profit of Rs. 200 i.e. Rs. (3500 – 3000) = Rs. 200. On the other hand, suppose the Put Option Buyer expects the stock price to fall below Rs. 3000, he pays a premium of Rs. 300 to the put option seller.

Now if the price of the stock falls to Rs. 2500, he will buy the stocks from the market and sell the Put Option seller at Rs. 3000 which is called the strike price. The put option buyer, therefore, makes a profit of Rs. 200.

This is how profits are made by buying a call option or a put option in the Options market.