What is Call and Put options?
Call and put options in the stock market are basically used in options trading. Option trading is a financial vehicle that allows the stockholder to buy or sell stocks, commodities, and bonds at a specific price within a certain time period.
Call Option:
A call option grants the right to buy assets at the strike price to the stockholder within a specific time period. If the price of the assets surpasses the call price, the stockholder receives the profit along with the premium paid for the option.
Example of Call Option:
Suppose you purchase a call option on ABC Developers with a strike price of Rs. 100 and an expiration date one month from the call. If the price of ABC Developers stock rises above Rs. 100 within the specified time period, the stockholder can purchase the stock at the agreed-upon rate, even if the market price is higher. The profit for the stockholder would be the difference between the market price and the strike price of the stock.
Put Option: The put option is the opposite of the call option. A put option grants the right to sell assets at the strike price within a specified period of time. Stockholders who hold put options typically anticipate a decrease in the asset's price. If the price of the assets falls below the strike price minus the premium paid, the stockholder profits.
Example of Put Option:
Suppose a stockholder buys a put option on ABC Developers with a strike price of Rs. 50 and an expiration date one month from the put. If the price of ABC Developers falls below Rs. 50 within the specified period, the stockholder can still sell the stock at Rs. 50, thereby profiting from the difference between the strike price and the market price.
Conclusion:
Options trading can be complex and involves significant risks, so it's essential to fully understand them before starting to invest in the market. It is crucial to conduct thorough research and study the market before making any investments.
How to calculate put-call
ratio?
The put-call ratio is a commonly used metric in options trading
that compares the volume of put options to call options traded on a particular
security. It's used by traders and analysts to gauge overall market sentiment,
particularly in relation to the expectation of future market direction. Here's
how you can calculate the put-call ratio:
Collect Data: Obtain the trading
volume data for both put options and call options for a specific security over
a given period. This data is typically available from financial websites,
brokerage platforms, or specialized market data providers.
Time Frame: It is depends upon the
time frame you want to analyze. It could be a single trading day, a week, a
month, or any other period you're interested in.
Calculate Put Volume: Add up the total volume
of put options traded during the chosen time frame.
Calculate Call Volume: Add up the total volume
of call options traded during the same time frame.
Compute the Ratio: Divide the total put
volume by the total call volume to get the put-call ratio.
Put-Call Ratio = Total
Put Volume / Total Call Volume
