The options contract is yet another type of derivative. This differs slightly from a futures contract in that it grants the buyer (or seller) the right, but not the duty, to buy (or sell) a certain asset at a given price at a particular predetermined date.
The call option and the put option are the two different kinds of options. A call option is a contract that gives the buyer the right, but not the obligation, to buy a particular asset at a specified price on a specific date. Assume you have bought a call option to buy 100 shares of XYZ Company at Rs 50 each on a specific date. However, the share price drops to Rs 40 below the expiration date, and since you will lose money if the contract is completed, you have no incentive in doing so. The choice to not buy the shares for Rs. 50 is then yours. As a result, you will only lose the premium you paid to get into the contract, which will be far less than losing Rs 1,000 on the deal.
Another type of option is the put option. The put option is a different kind of option. You can sell the assets in this kind of contract at a predetermined price in the future, but not the obligation. If, for instance, the price of XYZ Company shares rises to Rs 60 prior to the expiration date and you have a put option to sell shares at Rs 50 at a later date, you have the option of choosing not to sell the share. As a result, you would have saved Rs 1,000.
