Option is a legal contract in which the writer of the contract grants to the buyer, the right to purchase from or to sell to the writer a designated instrument or a scrip at a specified price within a specified period of time.
The right to purchase a specified stock is called the call option, while the right to sell a specified stock is called a put option.
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Example
Suppose a writer of an option writes a contract, which conveys or grants to the buyer the right to bur 100 shares of ITC from him, i.e. from the writer at the rate of Rs. 650 per share. This option is called a call option and is designated as 100 ITC 650 call.
Similarly, if a writer writes an option which grants to the buyer the right to sell to the writer 100 shares of ITC at Rs. 650 per share, such an option is called a put option and is designated as 100 ITC 650 put.
It should be noted that in a call option transaction, there is not put option involved. The writer is writing or selling a call option and the buyer is buying a call option. Similarly, in the case of a put option transaction there is no call option involved. The writer is writing or selling a put option and the buyer is buying a put option.
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