Short Take: Basics of Call and Put options trading

Akhil Nallamuthu |BL Research Bureau | Updated on: Apr 16, 2022

Call and put stock market signs with coins | Photo Credit: remco86

Derivative contracts can be futures or options and one must understand the concepts

I am interested in derivatives trading. I would like to know much more in details about Call and Put Options trading, and meaning of ITM, ATM and OTM options

Manikandan Menon

Derivatives, as the name suggest, is derived from an underlying which can be a stock or a commodity etc. Derivative contracts can be futures or options. Since you’ve asked specifically about options, here we explain what it is.

An options contract is an agreement between buyer and seller of that contract which gives buyer the right to buy standardised quantity of the underlying at a predetermined price at a certain time (on expiry). Note that seller is obliged to sell the underlying to the buyer if the buyer decides so. A call option gives the buyer (seller) the right (obligation) to buy (sell) the underlying and a put option gives the buyer (seller) the right (obligation) to sell (buy) the underlying.

When the strike price of an option (participants can choose this as per their expectation) is same or very near to the current trading price of the underlying, it is called at-the-money (ATM) option, whether it is call or put.

When asset price is higher than strike price of a call option, it is called in-the-money (ITM) option and vice-versa for put options. When the asset price is lower than strike price of call option, it is called out-of-money (OTM) option and the opposite is true for put option.

We’ve covered extensively about derivatives which you can find here. We also provide derivatives trading strategies every week.

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Published on April 16, 2022
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