Explain the differences between call and puts not just in de

Explain the differences between call and puts, not just in definition, but in actual workings of the option, price changes, time value, the Greeks, strategic use in a portfolio, risk management etc. Give an example of a company, and one call and one put for the company and explain the pricing differences and why they are?

Solution

The diffrence Between the call and put is that a call option gives a person a right but not a obligation to buy the underlying asset at the exercised price while the Put option gives a person a right but not a obligation to sell the underlying asset at the exrecised price.

A call option is to be taken if the value of the underlying asset goes upward while the put option is to be taken if the value of the underlying asset goes downward means the value of security is falling.

In case of call option there is unlimited potential gain but in case of put option a gain is limited only upto the price of the security less premium amount.

Let a spot price of any security is 100 and our expercise price is 120 and the option premium is 20

now assume if the future spot price of security is 150 then we earned net profit of

150-100-20 = 30$ and if the future spot price is 80 then in case we have a loss of $20 of premium amount

Similiarly assume we take a put option which is exercised at 100 and the premium amount is 20 and the future spot price is 50 then we earned a profit of 100 - 20 -50 = 30$ and if the price increase to more than 100 then we suffered a loss of amount paid for option premium

A Strategic use of call option is to hedge the risk of increase in price if we take a short position and similiarly a strategic use of put option is to hedge the risk of decrease in price if we take a long position. Time value of money may change the amount of call and put option premiums.

Now let us take a example of ABC the current stock price of a company is 200 and if we take a call option and our strike price is 240 after three months the the option premium amount of call option is near about 38$ and if we take a put option and strike price is 160$ and there is expectation to decrease of price then the premium amount is near about $40 There are many other factors also which are taken while considered the premium amount. The price diffrences in it is due to volatility of the share prices and interest rates and also many other factors The Reason of the price diffrences is due to the futire expectations of the prices of the company.