As we have already seen, you buy put option when you expect sharp downsides in the stock. Therefore you bet by limiting your risk to the option premium and play for the downside in the stock. You sell call option when you expect that the upsides for the stock are limited. You are indifferent to whether the stock is stable or goes down as long as the stock does not go above the strike price. Before getting into how to trade in call and put options, let us first understand the difference between call and put positions with the example aboveā€¦

Let us now consider 2 investors viz. Alpha and Beta. Alpha is an aggressive investor who believes that with the metals cycle already overpriced, Tata Steel price should correct. He expects the price to correct to Rs.640 in the next 1 week. He can sell the Tata Steel 680 call and get a maximum profit of Rs.24, which is a good profit on his margin. However, Alpha is taking on a very huge risk here. Since Alpha has sold the 680 Call at Rs.24, he is only covered up to Rs.704. Any price above that will result in unlimited losses for Alpha. The better option will be buy the 680 November Put option. If the price touches Rs.640, then he makes a profit of Rs.33/- (40-7). In a worst case scenario if the Tata Steel stock goes up to any level, his loss is limited only to Rs.7/- share.

Now, let us consider the case of Beta who is more conservative. Beta is of the view that the stock may be hovering in a range. While downsides are open, its upside is limited to Rs.720. The best option for Beta is to sell the 720 call. Buying the 720 put may be too expensive and buying the 680 put may be too out of the money. Selling the 720 call will give him a premium of Rs.7.50 and serve his view.