How to Choose Call or Put Options and Which is Better?
How to Choose Call or Put Options and Which is Better?
Call and put are the two sides of the same coin representing the trade action of traders in the derivatives market. Buying or selling the call or put depends on the market conditions and the combination of the trading strategies of the traders.
However, deciding which one to choose call or put for your trade is a challenging factor, especially if you are a novice in the derivatives market. To know how to select the call or put for trading you need to understand the call and put and how they are affected by the various situations in the market. Let’s find out the factors of how you can choose the call or put option.
In the derivatives market call option is a type of contract in which call buyers have the right to buy a particular underlying security at a particular price within a specific date range. Buying a call option comes with the authority to buy the call option at a particular price.
On the other hand, selling the call option means the call writer or seller has the obligation but not the right to sell the underlying security as per the pre-defined price and expiry date. The call buyer has the right to exercise the contract before expiry, while the call seller has an obligation to sell when the call buyer asks to exercise or sell the underlying security at the agreed strike price.
A put option is a contract in which the put buyer enters into this derivative contract with the right to sell the underlying security at a pre-defined strike price within a specific time range. Just like the call option, in the put option buyers don’t have the obligation to sell the underlying security. However, if put buyer wants to exercise the contract, put writer has to sell the underlying security.
Whereas, selling the put option means, the put writer or seller enters into the derivative contract with the obligation to sell the underlying security at a pre-defined strike price. While the put buyer has the right to exercise the contract within the expiry date or he or she can sell the same quantity of the puts in the market before the expiration of the contract.
Choosing between the call or one of the challenging factors for the traders and you would also become sometimes puzzled to decide which one to choose as per the market conditions. Buying or selling of call and put totally depends on the market condition and your expectation towards the movement of the market or the underlying security.
Usually buying a call means you are bullish in the market and expecting the price of the underlying security will rise before the expiration date of the contract.
Buying an uncovered put means, your sentiment is bearish in the market and you expect the price of the underlying security will go done within a specified time (before the expiry date).
If you want to sell an uncovered call then your perspective towards the underlying security should be bearish. It means you expect the price of the underlying security will either go down or trade around the same price till the expiry.
On the other hand, selling a put shows you expect either the price of the underlying security will go up or trade around the same price. However, selling the call or put without covering your trade position poses an unlimited risk that can push you into unexpected losses.
Buying or selling or calling and putting both comes with several risks and rewards that you need to understand. When you buy a call or put, you pay a certain amount as a premium, and when you sell a call or put, you receive the amount in the form of a premium. And entering into both these types of different contracts have different risk and reward ratios.
Buying the call or put option comes with several rewards and risks. And based on the market conditions you can choose to enter into the long or short call and put options. When buying a call or put option you pay a certain amount as a premium to buy the right to exercise your option before the date of expiry with full authority to sell the option anytime.
While on the other hand, when you sell a call or put you are bound in a contract to either buy back or exercise your contract before the expiry as per the option buyer’s action. Buying the options is less risky compared to selling, as the selling call option comes with unlimited risk. And there is also a less rewarding trading experience in the buying call option.
One of the biggest disadvantages of selling the options, is you have to deposit a huge amount of money to enter into the option selling trade position. You have to deposit the upfront payment as margin money to sell a call or put, and when you square off your trade position or buy back the same contract in the same quantity even if you are incurring the losses.
Nevertheless, buying a call can be profitable if you are sure the market will go up while buying the sell option works well when the market is likely to fall with significant changes. However, selling an uncovered call is profitable when the market moves down and you can sell but if you expect the market can move upwards to contract will become worthless before the expiry.
Obviously, in a bullish market, buying the call option and selling the put option can work, while in a bearish market, buying the put option and selling the call option would be the right decision. Buying the uncovered options is better compared to selling the uncovered option. But based on the market conditions you have to decide whether to buy a call or put option.