Call and Put Options: A Beginner-Friendly Guide For UAE Investors

Q: How do call and put options differ?

A call option makes money when the underlying asset’s price rises. A put option makes money when the underlying asset’s price falls. They are used for opposite market views.

Q: Does an Out-of-The-Money (OTM) option have intrinsic value?

No. An Out-of-The-Money option has zero intrinsic value. Its price only reflects time value and market expectations.

Q: Can I sell an option before its expiry?

Yes. You can sell an option anytime before expiry to book profits or limit losses. This is known as closing your position.

Q: What factors influence call option and put option prices?

Call and put option prices depend on the underlying asset’s price, strike price, time remaining until expiry, market volatility, and interest rates.

Q: What is the difference between Call option and Put option?

CE (Call Option) gives the right to buy the asset at a fixed price before expiry. PE (Put Option) gives the right to sell the asset at a fixed price before expiry.

Q: What is Moneyness?

Moneyness describes the relationship between the spot price and strike price. Options can be In-The-Money (ITM), At-The-Money (ATM), or Out-Of-The-Money (OTM).

Q: What are Nifty and Sensex?

Nifty is the benchmark index of the NSE. Sensex is the benchmark index of the BSE. Both track the performance of top-listed Indian companies.

Q: What are the types of trading?

Common trading styles include day trading, swing trading, scalping, and position trading, each differing in holding period and risk level.

Q: What is a butterfly strategy?

A butterfly strategy is a neutral options strategy that benefits from low volatility. It involves buying and selling options at different strike prices.

Q: What is a call put option trading?

A call option allows buying an asset at a fixed price before expiry, while a put option allows selling it. Traders use them to speculate on price movement or hedge existing investments.

If you’ve ever wondered how traders make money when markets go up and when they fall, the answer usually comes down to two powerful tools: the call and put options. A call option lets you buy an asset at a fixed price. A put option, meanwhile, lets you sell an asset at a fixed price. You are not forced to act — you only exercise the option if it benefits you.read more

What is an Option?

Options are derivative contracts. Their value depends on an underlying asset such as Stocks, Indices, and ETFs. In call put option trading, you are not trading the asset itself. Instead, you are trading the right to buy or sell it at a predefined price within a fixed time. Options are commonly used for:

Speculation (profiting from price movement)
Hedging (protecting existing investments)
Strategic positioning with limited capital

Key Participants in an Option Contract

Option Buyer
- Pays a premium
- Has a right, not an obligation
- Maximum loss is limited to the premium paid
Option Seller (Writer)
- Receives the premium
- Has an obligation if the buyer exercises the option
- Risk can be high or unlimited

There are two types of options: call option and put option.

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What is a Call Option?

A call option gives the buyer the right to buy an underlying asset at a fixed price (called the strike price) before the option expires. You buy a call option when you believe the asset’s price will increase.

Key Elements of a Call Option

Strike Price: Price at which you can buy
Expiry Date: The last date the option is valid
Premium: The price you pay to buy the option
Lot Size: Number of units per contract

What is a Put Option?

A put option is a financial contract that gives the buyer the right to sell an underlying asset at a fixed price (strike price) on or before a specified expiry date. You buy a put option when you expect the price to fall. Put options are commonly used for:

Profiting from bearish markets
Hedging portfolios during uncertainty

How a Put Option Works

Buyer pays a premium
Gains value when the asset price falls below the strike price
Expires worthless if the price stays above the strike price

This makes call option and put option strategies essential tools for risk management.

How to Calculate Call and Put Option Payoffs?

Here’s how you can easily calculate call option and put option values —

Call Option Payoff Formula:

Payoff = max (0, Spot Price − Strike Price)
Profit = Payoff − Premium
Put Option Payoff Formula
Payoff = max (0, Strike Price − Spot Price)

Understanding this math is critical before entering call put option trading.

Call and Put Options Examples

Let’s understand this with a practical example relevant to beginners.

Call Option Trade

Current stock price: AED 100 (You expect it to rise)
- Strike price: AED 105
- Premium: AED 3
- Lot size: 100 shares

Scenario 1: Price rises to AED 120

Intrinsic value = 120 − 105 = AED 15
Net profit per share = 15 − 3 = AED 12
Total profit = AED 1,200

Scenario 2: Price stays below AED 105

Option expires worthless
Loss = premium paid only (AED 300)

Put Option Trade

Current stock price: AED 200 (Expected decline)
- Strike price: AED 190
- Premium: AED 5
- Lot size: 100 shares

Scenario 1: Price falls to AED 170

Intrinsic value = 190 − 170 = AED 20
Net profit per share = 20 − 5 = AED 15
Total profit = AED 1,500

Scenario 2: Price stays above AED 190

Option expires worthless
Loss = premium paid only (AED 500)

This limited downside is why puts and calls for beginners are often preferred over direct stock buying.

Difference Between Call and Put Options

Call options and put options are the two core building blocks of options trading. While both are derivative contracts and share similar characteristics such as expiry dates, premiums, and strike prices, they are used for completely opposite market views.

Here is a head-to-head comparison of call option and put option in different aspects —

Aspect	Call Option	Put Option
Market Sentiment	Used when the trader expects the underlying asset’s price to rise (bullish sentiment)	Used when the trader expects the underlying asset’s price to fall (bearish sentiment)
Buyer’s View	Bullish (believes prices will move upward)	Bearish (believes prices will move downward)
Seller’s View	Bearish or neutral – expects prices to stay below the strike price	Bullish or neutral – expects prices to stay above the strike price
Maximum Profit (Buyer)	Unlimited, as there is no upper limit to how high prices can rise	Limited, as the maximum profit is capped if the asset price falls to zero
Maximum Loss (Buyer)	Limited to the premium paid	Limited to the premium paid
Risk to Seller	Potentially unlimited if the asset price rises sharply	High but limited, since the asset price cannot fall below zero
Exercise Right	Buyer has the right to buy the asset at the strike price	Buyer has the right to sell the asset at the strike price
Premium Payment	Paid by the buyer to gain the right to buy	Paid by the buyer to gain the right to sell
Price Movement Impact	Profitable when the market price exceeds the strike price	Profitable when the market price falls below the strike price
Primary Usage	Speculation on rising prices or hedging against price increases	Speculation on falling prices or hedging against price declines

Understanding Strike Prices in Call and Put Option Trading

Strike price determines whether an option has value.

In-The-Money (ITM)

Call: Strike < Market price
Put: Strike > Market price

At-The-Money (ATM)

Strike ≈ Market price

Out-of-The-Money (OTM)

Call: Strike > Market price
Put: Strike < Market price

For puts and calls for beginners, ATM and ITM options provide better predictability.

How to Buy and Sell Call Put Trading Options

Options trading involves four basic actions: buying calls, selling calls, buying puts, and selling puts. Each serves a different purpose and carries a different level of risk.

How to Buy a Call Option?

Choose a stock or index
Select an expiry date and strike price
Pay the option premium upfront
Profit if the price moves above the strike price before expiry

Example: If you buy a call option for AED 5 per unit and the price rises strongly, the option value increases. If the price doesn’t rise, your maximum loss is limited to AED 5.

How to Sell a Call Option?

You receive the premium upfront
You are obligated to sell the asset if the buyer exercises the option

Risk: If the price rises sharply, the losses can be very high. This is why call selling is considered especially high-risk.

How to Buy a Put Option?

You pay a premium upfront
The option gains value if the asset price declines
Your loss is strictly limited to the premium paid

This makes buying puts popular for hedging and downside protection.

How to Sell a Put Option?

You receive the premium upfront
You are obligated to buy the asset if the price falls below the strike price

Risk: If the asset price drops sharply, you may be forced to buy it at a much higher price.

Why Do UAE Investors Use Call and Put Options?

Options trading has become increasingly popular among investors in the UAE for several reasons:

Lower capital requirement compared to buying stocks directly
Access to global markets like India, the US, and international indices
Portfolio hedging, especially during volatile markets
Defined risk for buyers, since losses are capped at the premium paid

However, options are not a get-rich-quick tool. They require discipline, proper risk management, and a strong understanding of market behaviour.

Used correctly, call options and put options can be powerful tools. Used without caution, they can be costly.

Important Terms You Must Know Before Call Put Option Trading

Before taking any call and put option trades, it’s important to understand a few core options trading terms —

Spot Price: The spot price is the current market price of the underlying asset (stock or index). For example, if a stock is trading at AED 100, then AED 100 is the spot price.
Strike Price (Exercise Price): The strike price is the pre-decided price at which a call option buyer can buy the asset and a put option buyer can sell the asset. This price is fixed when the option contract is created and does not change until expiry.
Intrinsic Value: The intrinsic value is the real, immediate value of an option. Only In-The-Money (ITM) options have intrinsic value. ATM and OTM options have zero intrinsic value.
Time Value: The time value is the extra amount paid over the intrinsic value. It reflects the possibility that the option may become more profitable before expiry.
Option Premium: The premium is the price of the option, paid upfront by the buyer to the seller. Premium = Intrinsic Value + Time Value
Expiry Date: The expiry date is the last date on which the option contract is valid. After expiry, the option becomes worthless if not exercised. Most stock and index options expire monthly.
Settlement: Settlement is how the option contract is closed at expiry. Most index options are cash-settled. Some stock options may involve delivery (depending on rules).
Lot Size: The lot size is the fixed number of units in one option contract. For example, if the lot size is 25, and the premium is AED 4, the total premium paid = 4 × 25 = AED 100.
Moneyness (ITM, ATM, OTM): Moneyness shows whether an option is currently profitable.
Theta & Time Decay: Theta measures how fast an option loses value as expiry approaches. This loss of value is called time decay. Time decay accelerates sharply near expiry
Open Interest (OI): Open Interest shows the number of active option contracts currently open in the market.

Final Conclusion: Are Call and Put Options Right for Beginners?

Call and put options are powerful tools that allow traders to manage risk, hedge portfolios, and profit from price movements without owning the underlying asset. However, options trading involves high risk. Data also shows that most retail traders incur losses without proper understanding.

If you’re new, mastering call and put options, strike prices, and payoff calculations is essential before trading with real money.

Thumb Rule for Beginners: As a beginner, even if you want market exposure, it’s recommended to go for mutual funds, ETFs, and other similar instruments. Click the button below to find more such investment options for yourself!

FAQs for Call and Put Option