Following are the main examples of call and put options. I recommend, you should read these examples 2 or 3 times. Write it with your own example. Teach it to your friend or students. Only after this, you will understand these examples.
1. Call Option Example:
ABC Company's current market value is $ 100 per share. Mr. Mohan has 1000 shares. He want to sell immediately through call option contract. Mr. Sohan expects that price of same shares will increase upto $ 110 per share. He is ready to enter in this call option contract. For this, he has to pay $ 10 per share. If it will not become $ 110 per share, he will have the option right. If shares value will not reach upto $ 110 per shares, he can leave this contract. Now, this time paid only $ 10 per share. For this, he paid $ 10 X 1000 = $ 10,000
Now, there are two options for buyer.
A) Before expiry of contact, market price does not rise. Buyer does not buy 1000 shares at $ 110. He lost only $ 10,000 and save further losing of $ 10,000 due to exercising this contract.
B) Before expiry of contract, market price reached at $ 130 per share. Buyer exercise this contract and bought all by paying just $ 110 per share. For this, he paid only $ 1,10,000 and
Total gain = $ 1,30,000 - 1,10,000 = $ 30,000
Net Gain = $ 30,000 - $ 10,000 = $ 20,000
2. Put Option Example :
ABC Company's current market value is $ 100 per share. Mr. Mohan has 1000 shares. He want to sell immediately through put option contract. Mr. Mohan expects that prices of this shares will fastly fall. So, he is ready to fix strike low price. Mr. Sohan is interested to buy at low price under put contract. Strike price is $ 90 which is less than current price. Now, strike price is $ 10 less. So, seller will pay $ 10 per share to buyer. So, seller paid $ 10 X 1000 = $ 10,000 at this time. Now, seller has right to leave the contract, if prices will not fall. Buyer has obligation to buy the shares at strike price if prices will fall upto the expiry of contract or maturity.
For this, he has to pay $ 10 per share. If it will not become $ 90 per share, he will have the option right. If shares value will not reach upto $ 110 per shares, he can leave this contract. Now, this time paid only $ 10 per share. For this, he paid $ 10 X 1000 = $ 10,000
Now, there are two options for Seller.
A) Before expiry of contact, market price does not fall. Seller does not sell 1000 shares at $ 90. He lost only $ 10,000 and save further losing of $ 10,000 due to exercising this contract.
B) Before expiry of contract, market price reached at $ 70 per share. Seller exercise this contract. He sold $ 70 price per share at $ 90 per share under put option.
Total gain = $ 90,000 - 70,000 = $ 20,000
Net Gain = $ 20,000 - $ 10,000 = $ 10,000
1. Call Option Example:
ABC Company's current market value is $ 100 per share. Mr. Mohan has 1000 shares. He want to sell immediately through call option contract. Mr. Sohan expects that price of same shares will increase upto $ 110 per share. He is ready to enter in this call option contract. For this, he has to pay $ 10 per share. If it will not become $ 110 per share, he will have the option right. If shares value will not reach upto $ 110 per shares, he can leave this contract. Now, this time paid only $ 10 per share. For this, he paid $ 10 X 1000 = $ 10,000
Now, there are two options for buyer.
A) Before expiry of contact, market price does not rise. Buyer does not buy 1000 shares at $ 110. He lost only $ 10,000 and save further losing of $ 10,000 due to exercising this contract.
B) Before expiry of contract, market price reached at $ 130 per share. Buyer exercise this contract and bought all by paying just $ 110 per share. For this, he paid only $ 1,10,000 and
Total gain = $ 1,30,000 - 1,10,000 = $ 30,000
Net Gain = $ 30,000 - $ 10,000 = $ 20,000
2. Put Option Example :
ABC Company's current market value is $ 100 per share. Mr. Mohan has 1000 shares. He want to sell immediately through put option contract. Mr. Mohan expects that prices of this shares will fastly fall. So, he is ready to fix strike low price. Mr. Sohan is interested to buy at low price under put contract. Strike price is $ 90 which is less than current price. Now, strike price is $ 10 less. So, seller will pay $ 10 per share to buyer. So, seller paid $ 10 X 1000 = $ 10,000 at this time. Now, seller has right to leave the contract, if prices will not fall. Buyer has obligation to buy the shares at strike price if prices will fall upto the expiry of contract or maturity.
For this, he has to pay $ 10 per share. If it will not become $ 90 per share, he will have the option right. If shares value will not reach upto $ 110 per shares, he can leave this contract. Now, this time paid only $ 10 per share. For this, he paid $ 10 X 1000 = $ 10,000
Now, there are two options for Seller.
A) Before expiry of contact, market price does not fall. Seller does not sell 1000 shares at $ 90. He lost only $ 10,000 and save further losing of $ 10,000 due to exercising this contract.
B) Before expiry of contract, market price reached at $ 70 per share. Seller exercise this contract. He sold $ 70 price per share at $ 90 per share under put option.
Total gain = $ 90,000 - 70,000 = $ 20,000
Net Gain = $ 20,000 - $ 10,000 = $ 10,000
