Meet Ajay & Ashish
Ajay believes, the shares of ABC Mobiles, currently priced at Rs. 300, is going to rise. Ashish, who owns some shares of ABC Mobiles is expecting the price to fall.
So, Ashish agrees to sell his shares to Ajay for Rs.320 each in a month’s time. They sign the contract of call option, by which Ajay gains the right to buy and Ashish becomes obligated to sell the shares at the agreed price on the set date.
The fee that Ajay pays Ashish for the option, called premium is Rs.20 per share.
If the share price shoots up to Rs.400 in a month Ajay can use the option and earn a profit of Rs.60 after deducting the Rs.20 he had paid as premium.
If the price stays lower than Rs.320, then Ajay loses the Rs.20 he paid for the option.
Call options are for investors, waiting to leverage their capital for greater investment returns.
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