What is an Option? Put Option and Call Option Explained

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An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset (a stock or index) at a specific price on or before a certain date (listed options are all for 100 shares of the particular underlying asset). An option is a security, just like a stock or bond, and constitutes a binding contract with strictly defined terms and properties.

While it is a little more complex than stock trading, options can help you make relatively larger profits if the price of the security goes up. That’s because you don’t have to pay the full price for the security in an options contract. In the same way, options trading can restrict your losses if the price of the security goes down, which is known as hedging.

The right to buy a security is known as ‘Call’, while the right to sell is called ‘Put’.

They can be used as:

  • Leverage: Options trading help you profit from changes in share prices without putting down the full price of the share. You get control over the shares without buying them outright.
  • Hedging : They can also be used to protect yourself from fluctuations in the price of a share and letting you buy or sell the shares at a pre-determined price for a specified period of time. One of the integral parts of hedging yourself against market fluctuations is to do financial planning.


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