InvestorQ : How do options work in practice and can you explain what exactly is a call option?
Nishant Chandani made post

How do options work in practice and can you explain what exactly is a call option?

Answer
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Abhi Yadav answered.
1 year ago


How exactly do options work? We have all heard of call and put options and options trading. But how to trade options and what are the key features of options trading in India. Let us first understand what call options is and then let us get deeper into call options with an example. Let us begin with a call option.

A call option is a right to buy without an obligation to buy. So if you have a call option on TCS then you have the right to buy TCS but no obligation to buy TCS at a pre-determined price. For example, if you have bought a TCS 1-month 2700 call option at a price of Rs.45. On the settlement day if the price of TCS is Rs.2850, the option is profitable to you. But if on that date the price of TCS is Rs.2500 then you are not interested in buying TCS at 2700 when you can buy it in the open market at Rs.2500. For this right without obligation you pay a premium of Rs.45, which will be your sunk cost.