Derivative trading, especially options trading, has grown rapidly in India over the last few years. Data from global derivatives associations indicates that around 84% of all equity options worldwide were traded on Indian exchanges in early 2024. This highlights India’s dominant position in the global options market.

Despite this surge, a large section of retail traders still struggles with the fundamentals. This is where call and put options become complicated and not so clear.

Many beginners enter the derivatives market without fully understanding what are call and put options or the real difference between call vs put options in the stock market, leading to avoidable losses. 

Drawing from industry research and practical market experience, this blog breaks down these concepts in a simple, actionable way to help you trade more confidently and manage risk better.

Let’s begin by understanding how call and put options actually work.

What Are Call and Put Options?

Options are derivative contracts whose value comes from an underlying asset such as a stock or an index. In India, they are commonly traded on indices like Nifty and Bank Nifty, as well as on select NSE listed stocks.

An option gives the buyer a right, but not an obligation, to take a position at a predetermined price on a specific expiry date. In the Indian market, index options follow the European style example: CE = CALL EUROPEAN and PE = PUT EUROPEAN. Meaning they can be exercised only on expiry, reducing execution risk for retail traders.

Options express two different market views:

• Call Option:
  Used when you expect the price of a stock or index to rise. The buyer gains the right to buy the underlying asset at a fixed price till expiry.
  
• Put Option:
  Used when you expect the price of a stock or index to fall. The buyer gains the right to sell the underlying asset at a fixed price till expiry.
  

Understanding how call and put options reflect bullish and bearish expectations helps you know about options trading and risk management.

Call and Put Options Explained in Simple Terms

Knowing how call and put options move in the market is the key to successful trading, and an option payoff diagram is one way that you can visualise what a specific call or put option will be at different prices, depending on its strike price and its gain or loss at a particular price.

Call Option Explained

A call option gives the owner the right to purchase an Underlying asset at a predetermined price on the maturity date.

The traders usually buy call options, which they anticipate that the underlying asset will gain value, hence making a profit when they buy a call option.

Example:

• Stock XYZ is currently trading at ₹1,000
  
• You buy a call option with a strike price of ₹1,020
  
• If the stock price rises to ₹1,080, the call option gains value
  
• Your profit increases as the price moves above the strike price, after adjusting for the premium paid
  

Key points to remember:

• Maximum loss is limited to the premium paid
  
• Breakeven point = Strike Price + Premium
  
• Profit potential increases as the price moves higher beyond breakeven
  

This risk defined structure is what makes call options popular among bullish traders.

Put Option Explained

When buying a put option, you are buying the right (and not the obligation) to sell the underlying asset at a given price (the “strike price”) by a given date (the “expiration date”).

Most investors buy put options when they think that a given investment will depreciate, and thus they will earn money on the depreciating value of the put option itself when they sell it.

Example:

• Stock XYZ is currently trading at ₹1,000
  
• You buy a put option with a strike price of ₹980
  
• If the stock price falls to ₹920, the put option gains value
  
• The option becomes more profitable as the price moves below the strike price, after accounting for the premium paid
  

Key points to remember:

• Maximum loss is limited to the premium paid
  
• Breakeven point = Strike Price − Premium
  
• Profit potential increases as the price falls further below breakeven
  

NOTE: Most traders use put options to capitalise on declining markets and hedge current portfolios against future price drops.

Call vs Put Options in Stock Market: Key Differences

It is important that you know the distinction between call and put options when deciding to trade.

In short:

• Call options benefit from rising markets
  
• Put options benefit from falling markets
  

For example, when there is an expectation that a stock or index will rise due to a bullish trend, traders will use call options to take part in that rise without losing their entire amount of capital.

During market corrections or uncertainty, traders typically look to use put options to take advantage of falling prices or to protect their current holdings.

These examples provide insight into using options according to market direction rather than by chance.

Why Options Trading Is So Popular in India

Options trading attracts investors because of its leverage, flexibility, and limited risk for buyers. Some key reasons for its popularity include:

• Lower capital requirement compared to cash market trading
  
• Ability to profit in rising, falling, or sideways markets
  
• Hedging tool for long term investors
  
• High liquidity in index options like Nifty and Bank Nifty
  

However, despite its advantages, options trading comes with challenges. According to the findings reported by the Securities and Exchange Board of India (SEBI), 80 to 90% of all individual equity derivative traders realise net losses primarily because of a lack of educational knowledge regarding derivatives and excessive trading activity.  This highlights the importance of thoroughly understanding how to use calls and puts before entering the market.

Option Premium: The Cost of Buying Options

When you buy a call or put option, you pay a price called the option premium. The premium depends on several factors:

• Current price of the underlying asset
  
• Strike price
  
• Time remaining to expiry
  
• Market volatility
  
• Interest rates
  

The option buyer’s reason for limiting their maximum loss to the premium paid for the option makes options safer for beginners than futures.

Time decay (theta) decreases option premiums as they near their expiration date, thereby working against option buyers. An important consideration when entering and exiting from options trading.

How Call and Put Options Are Used by Traders

1. Directional Trading

Traders use:

• Call options when expecting upward movement
  
• Put options when expecting downward movement
  

This allows traders to take directional bets with limited downside risk.

2. Hedging and Risk Protection

1. Directional Trading
   Traders use:
   

• Call options when expecting upward movement
  
• Put options when expecting downward movement
  

This allows traders to take directional bets with limited downside risk.

2. Hedging and Risk Protection
   Options are widely used to protect existing investments.
   Example: If you hold stocks for the long term but anticipate short term market weakness, buying a put option can safeguard your portfolio from downside risk. This strategy works like insurance for your investments.
   
3. Income Generation (Advanced Use)
   Experienced traders sell call and put options to earn premium income.
   

Caution: Option selling involves unlimited or high risk and should only be attempted with proper margin, experience, and risk controls. It is not recommended for beginners without thorough knowledge.

Common Mistakes Traders Make with Call and Put Options

Many losses in options trading are avoidable. Some frequent mistakes include:

• Buying options without understanding time decay (theta)
  
• Trading based on tips or social media noise
  
• Overtrading due to low option prices
  
• Ignoring volatility impact
  
• Not having a defined exit strategy
  

According to market data and regulatory studies, time decay and poor risk management are among the biggest reasons retail traders lose money in options. 

Short term weekly options suffer the highest impact of time decay, which is why many retail traders experience frequent losses when they trade without proper strategy.

Key Factors to Check Before Buying Call or Put Options

It is essential to assess various elements to control the risk involved and improve the likelihood of being profitable before undertaking any options transaction:

• Market Trend – Initially, establish if the current market or the stock you are trading is trending bullish, bearish, or sideways prior to determining the right option type. Understanding the direction of the market or stock will be the basis for selecting the best type of option.
  
• Volatility Levels – The higher the degree of volatility, the greater the premium you will pay for options. However, higher volatility also tends to increase profit opportunities. Again, evaluate volatility to determine the best time to enter and exit trades.
  
• Time to Expiry – As options near expiration, they will continue to lose value because of time decay (theta). This means that you should ensure that the time horizon for your trades aligns with your view of the market.
  
• Risk Reward Ratio – Weigh the potential reward of your trade to the potential loss of your trade to make sure that it is worth taking the risk to execute the trade.
  
• Stop Loss and Target Levels – That being said, prior to placing any trade, make sure that you have predetermined exit points based on your trading strategy, so that you will not become emotionally influenced by fluctuating market conditions, and take irrational actions..
  
• Position Sizing –  Always limit the amount of risk you take on a single trade to a small percentage of your entire account balance, to protect yourself from losing an excessive amount of capital should the trade go against you.

Successful options trading isn’t just based on trying to predict the movement of a security; it also relies on using probabilities and discipline in addition to properly managing risk. 

By understanding these three areas, traders will be able to make better informed investment decisions, have lower risk profiles, and increase the probability of success with their options trading strategies.

Are Call and Put Options Suitable for Beginners?

Call and put options can be suitable for beginners if approached responsibly. However, it’s important to remember that options trading is not a shortcut to quick profits. 

Beginners should treat it as a learning process to build skills, understand market behaviour, and manage risk effectively.

Best practices for beginners include:

• Start with index options instead of stock options for better liquidity and lower risk
  
• Trade small quantities to limit potential losses
  
• Focus on learning, not quick profits
  
• Avoid weekly expiry and overtrading, which are highly sensitive to time decay
  
• Combine options with proper research and risk management to make informed decisions
  

At RMoney India, we emphasise education driven trading and disciplined execution to help beginners navigate options markets safely and avoid common pitfalls.

Call and Put Options Explained: Final Thoughts

It is essential to understand both call and put options before beginning to trade options. Call and put options are very powerful products and can provide a great deal of opportunity; however, it is critical to understand how to properly utilise them with knowledge, patience, and structure.

To summarise:

• Call options benefit from rising markets
  
• Put options benefit from falling markets
  
• Loss for buyers is limited to the premium paid
  
• Options can be used for trading, hedging, and portfolio protection
   

Understanding how call and Put Options function, as well as how the two types of options differ from each other, can help traders make informed decisions instead of guessing when trading stocks. 

Traders who subscribe to RMoney India are provided with insights that are based on proper research, education and risk management strategies to help them trade confidently when trading options.

About Author

Megha Singh

I have expertise in simplifying complex concepts around trading and investing into clear, practical insights. At RMoney, I write on trading, equity markets, derivatives, and long-term investing to help readers make informed financial decisions. My writing is focused on delivering clarity and confidence to investors at every stage of their journey.