The first game. 

Let us assume that the share price of Infosys is trading at Rs. 1000. For an amount of Rs. 6 per share, you get the right to purchase 1000 shares on condition that if the price were to move up and strike Rs. 1090, you can retain the increase on the 1000 Infosys shares. If the price were to fall, you don’t have to incur the drop suffered on 1000 shares. At the worst, you stand to lose only the small amount you had paid for taking part in the game. 

In case the price reaches Rs.1090, and you win, you stand to make quite a bit of money. If the price were to move up to Rs. 1090, you profit by an amount of Rs. 90,000 (1000*90) less the Rs. 6,000 (6*1000). That is Rs.84,000. If the price came down, you lose the amount of Rs. 6,000 for taking part in this game. 

If you had played this game, you would have had the opportunity to make unlimited profits and your losses limited to Rs.6000. 

The second game. 

Let us assume that the share price of Infosys is trading at Rs. 1000. For an amount of Rs. 6 per share, you have the right to sell 1000 shares. The condition is n that if the price were to move down and strike Rs. 910, you can retain the decrease on the 1000 Infosys shares. If the price were to rise, you don’t have to incur the losses suffered on 1000 shares. At the worst, you stand to lose only the small amount you had paid for taking part in the game. 

In case the price reaches Rs. 910 and you win, you stand to make quite a bit of money. If the price were to go down to Rs. 910, you profit by an amount of Rs. 90,000 (1000*90) less the Rs. 6,000 (6*1000). That is, Rs. 84,000. If the price went up, you lose the amount of Rs. 6,000 for taking part in this game. 

If you had played this game, you would have had the opportunity to make a limited profit and also would have limited your losses. 

If you are wondering whether any such games do exist, then there is indeed a game called options. 

Now let us try to understand this better. 

The first game is called a CALL option and what you did was to buy a call option. 

The second game is called a PUT option and what you did here was to buy a put option. 

• The buyer of options, whether it is a call or a put, is called the ‘holder’. 

• The Stock market is the place where options are bought and sold. 

• Options get introduced by the stock exchange, where one can buy and sell the same. 

• If one is expecting the stock price to go up, then that person would buy a call option. On the contrary, if the person is expecting the price to drop, then he or she will buy a put option. 

Now the question is who sells the options. One can buy an option only when there is someone to sell it, and these sellers are called the writers of options. Option writers are those who have an opposite view to that of the buyer of options. While the buyer of the call option expects the price to rise, the writer of the options (seller) expects the price to fall. 

It would be quite logical to think, if anyone expects that the price will rise, they will sell a put option, or they could have bought a call option because both the actions seem to have the same effect. But it is not so. 

The reason is that both these actions are the expectation that the price of the stock will rise. The opinion of both the buyer of a call and the writer of a put is the same. The similarity ends here. 

If a person reasonably feels that the prices are likely to move up, he or she will decide to buy the share. But If one were one hundred percent sure that the price will go up, that person would have purchased those shares directly instead of buying call options. In the same way, a person decides to buy a put option when he reasonably feels that the prices are going down. 

Writer or sellers of calls and puts options do it for another reason. These people are shareholders who would like to safeguard themselves from volatility in price and also gain from it. As they ‘sell the right’, option writers are bound to perform their part and honor the obligation. 

Here is a summary of what we saw above. 

• Stock exchanges introduce the option contracts. 

• The two types of options are the Call option and the Put option. A call option means a right to buy and Put option, a right to sell. 

• Buy means to hold. In case you are a buyer of an option, you are called a ‘holder’ of option. 

• Sell means to write. In case you are a seller of an option, you’re called the ‘writer’. 

• One can hold either a call option or a put option. A holder of an option has the ‘option’ to buy or sell and do not have an obligation.  

• Depending on the movement of price, a holder of a call option holder could receive un-limited gains while the losses are limited. A holder of the put option will have the loss and profits limited. 

• One can write a call option or write a put option, and as a writer, the person has to perform. The writer of a call option must sell, and the writer of a put option is obliged to buy.

• Depending on the movement of price, the writer of the call option writer could incur unlimited losses or make a limited profit. The writer of a put option will incur only make limited losses or make limited profits. 

• Option writing is a risky business because of the obligation. 

• If one is bullish on a stock, the person will purchase Call options that give the right to buy the share at the current price on a future date. In other words, when the price moves up in the future, the buyer of the call option will make money. On the other hand, if the value of the stock were to go down, then the holder will not exercise the right to buy at the current price. One loses only the premium paid while buying the call options. 

• If one is bearish on a stock, the person will purchase Put options that give the right to sell the share at the current price on a future date. In other words, when the price moves down in the future, the buyer of the put option will make money. On the other hand, if the value of the stock were to go up, then the holder will not exercise the right to sell at the current price. One loses only the premium paid while buying the put options. 

• Option writing is resorted to control the risk of shares held by the person or to safeguard the profits or make money from option writing.