Types of Options

Call and put options are the two main types of options. They differ based on whether you get the right to buy or sell the underlying asset.

• A call option gives you the right to buy the underlying asset at the strike price.
• A put option gives you the right to sell the underlying asset at the strike price.
• American options can be exercised on or before the expiry date.
• European options can be exercised only on the expiry date.
• Exotic options have non-standard structures, such as barrier, binary, and Asian options.
• Options may have stocks, indices, currencies, or commodities as their underlying assets.
• The amount paid to buy an option is called the option premium, while the predetermined transaction price is the strike price.
   

Options are financial contracts that give you the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specified period. This means you can choose whether to exercise the option depending on the market situation and the terms of the contract.
The underlying asset can be a stock, index, currency, or commodity. Traders and investors may use options to manage risk through hedging or to take a view on how the price of an asset may move over time.
The two main types of options are call options and put options. A call option gives you the right to buy the underlying asset, while a put option gives you the right to sell it at the agreed price.
The amount you pay to buy an option is known as the option premium. The predetermined price at which the underlying asset can be bought or sold is called the strike price. Both the premium and strike price are important when evaluating how an options contract may perform.
 

1. Call options

A call option gives you the right, but not the obligation, to buy the underlying asset at a predetermined strike price within the specified period.

Traders generally buy call options when they expect the price of the underlying asset to rise.

For example, suppose a stock is priced at ₹500 and you buy a call option with a ₹500 strike price because you expect the stock price to rise towards ₹600. Whether the trade is profitable will also depend on factors such as the option premium paid.

2. Put options

A put option gives you the right, but not the obligation, to sell the underlying asset at a predetermined strike price within the specified period.

Traders generally buy put options when they expect the price of the underlying asset to fall.

For example, suppose a stock is trading at ₹800 and you buy a put option with an ₹800 strike price because you expect the price to fall towards ₹700. The final outcome will also depend on the option premium paid.

3. American options

American options can be exercised at any time on or before their expiration date.

This gives the option holder greater flexibility over when the option can be exercised.

4. European options

European options can be exercised only on their expiration date.

The main difference between American and European options is therefore the timing of exercise.

5. Exotic options

Exotic options are non-standard options that have features or structures different from regular call and put options.

Examples mentioned in this category include:

• Barrier options
• Binary options
• Asian options

These options generally involve more complex terms and are typically used for specialised strategies.

Hedging strategies

Options can be used to manage the risk of unfavourable price movements in the market. Investors may use them to protect an existing position when they are concerned that the price of an asset could move against them.
For example, an investor who owns shares may buy put options to reduce the impact of a fall in the share price. The put option gives the investor the right to sell at the specified strike price, subject to the contract terms. This can provide some protection if the market price declines.

Speculative strategies

Options can also be used to take a view on expected market movements without directly owning the underlying asset. Traders may use call or put options depending on whether they expect prices to rise or fall.
For example, a trader expecting an asset’s price to increase may consider a call option, while a trader expecting the price to decline may consider a put option. The final outcome depends on several factors, including the movement in the underlying asset, strike price, expiry date, and option premium paid.
 

Options can be classified in different ways, with call and put options being the two main types. Calls give you the right to buy, while puts give you the right to sell at a specified strike price. Options may also be classified as American, European, or exotic based on their exercise rules and structure. Understanding these differences can help you understand how options are used for hedging and taking a view on market movements.