Call Option - Explained in Hindi - YouTube

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Hello, my name is Mukul and you are welcome to the Asset Yogi

Friends in this video we will understand the call option in detail

This video is also part of a series in which we will discuss financial derivatives

We have already made the videos regarding forwards, futures, and swaps

If you haven't watched them yet, then make sure to watch it

You'll find the link in the description

Now we are discussing options. We had discussed the basis of options in the last video

We understood with our daily life examples what the call option and what the put option is.

In this video, we will go into more detail of call option

What type of graphs are made in profit and loss, we will see that

Both the call option and the put option can be used in different investments

Like bonds, stocks, interest rates

Or even there are options on swaps also

So how do these options work?

What type of loss and profit can be?

So stay tuned with the video

Let's go straight to the blackboard

Music

I had already discussed the call option in the basic video

We will summarize it quickly

If you buy a call option

It means you are giving an advance for buying it

You can consider it as a non-refundable advance

Advance or we can say it booking amount or we can say it registration amount

Or we can call it a premium

You are giving this money to buy that option which is non-refundable

Let's understand this with an example

We will take a simple example

Assume you are booking an apartment with a builder

And you think that the value of that apartment

Will increase in the future

Because there will be a convention center near it

If this much commercial activity will increase

Then obviously the demand for the apartment will also increase

There are more chances of the price getting high

But you are not sure

If this convention center will come or not

So the builder gives you an option

That you do your booking

You will give only 50,000 Rs as your booking amount

The price will be 50 lakh Rs

And you have to give this 50 akh Rs after 2 years

What will happen in this situation?

Because you are expecting that a convention center will come there

You get ready to enter this contract

You will give 50,000 Rs to that builder

This 50,000 Rs is non-refundable

You have to give 50 lakh Rs after 2 years

You just locked your price for after 2 years by giving 50,000 Rs

So see two scenarios are formed

The first scenario is the convention center is made

Or at least its construction has been started

Once the construction has started then your risk is quite minimal

In this case, the market price goes to 60 lakh Rs

The demand increases suddenly

So the market price goes up to 60 lakh after two years

So you execute your option

You go and give 50 lakh Rs to the builder and you had already given this 50000 Rs

So your total investment became 50,50,000 Rs

What is your profit then?

If you sell the house hand in hand in 60 lakh Rs

Then, 60 lakh minus 50 lakh in which you bought it

And you had given 50,000 Rs, then your profit is 9.5 lakh

So this was scenario one

When at least the construction of the convention center get started

In scenario two, assume there is no news of the convention center

and construction hasn't started yet. In this case, the price drops

Now the market price of this house becomes 45 lakh Rs

But the contract with the builder was of 50 lakh Rs

So why will you buy the house of 50 lakh Rs whose market value is 45 lakh Rs

You will buy directly from the market for 45 lakh Rs

So in this case, the 50,000 Rs that you have given will be nullified

That amount will be forfeited

You will not execute the option

So your loss is limited to 50,000 Rs

What happened with you here is you have the option by giving 50,000 Rs

You have the right to buy this house for 50 lakh Rs after 2 years

So this was the call option

In this, the underlying asset was a real estate

Now underlying assets can be anything

It could be stock, commodity, interest rate, and swap also

So if we talk about the definition of the call option

So it is a contract between an option writer, which means the seller

Just like in this case the builder sold you the option

And an option holder or buyer

You have purchased the option under this contract

Then you are an option buyer under this

That gives the option buyer a right to buy

Like you had the right to purchase the apartment

But not the obligation, it wasn't necessary for you to buy that apartment

You had an option that's why you had right

A stock or underlying asset

Like we have talked about the stock or underlying asset

So the underlying asset here is real estate

At a predetermined price by a prespecified date

What is the predetermined price? The predetermined price here was 50 lakh

What was the prespecified date?

You had to give 50 lakh Rs after 2 years

So in this way, the contract of a call option is made here

So in the same way all the call options operate in the same way

These basic conditions should be met

When we talk about stock option and commodity option

Then some technical terms are involved in that

The prespecified time is called the expiry date

The price, in this case, was 50 lakh Rs

You want to buy something after a particular time

In whatever price

You have locked it already, then we will call it the strike price

The booking amount is called premium

This means the contract that you have bought, you have given the premium for that

I was talking to you about this only

You have given advance, booking, registration, or premium amount

And what is the spot price? The price in which it was available in the market after the expiry date

On the expiry date, the market value of this apartment was 60 lakh

So it is spot price here. Spot price means the current share price

I will write it here

If we talk about the stocks then the current share price will become the spot price here

I think the basics of call options are cleared here

Now see when you talk about the stocks then I have told you in the previous video

You will see the options in this way, first, you will get this symbol

Let's say the option of ABC Company is available

There is ABC written after that 28 February, your expiry date will be written there

This hundred is your strike price

That on 28 February

You have to buy this stock at 100 Rs

Assume on today's date, on 29 January

This means you are purchasing this option for after 1 month

You have to buy this stock on 28 February at 100 Rs

And this CE means that this is a call option

I will write it down here, this is Call European option

I have already told you about the difference between the European and American call option

In the European option, you can execute this call option on the expiry date only

You cannot do that before it

In India generally call options are traded European

This means only European options are traded

That's why I have taken the example of CE

The spot price is denoted by S

On today's date when you are executing this

Let's say the spot price of this stock on 29th January is 90 Rs

You have executed the strike price of 100 Rs

This means you have to buy this call option

At 100 Rs on 28 February

You are giving only 10 Rs premium

This means that the option you are buying

You have to give the actual price of only 10 Rs

So let's go and understand the call option with graph

We will see how the graph of a call option is made

This is a graph. Now I have made this long call graph

What is the meaning of a long call? You already know the meaning of long

Long means to buy. Whenever you do long stock it means that you are buying them

So if you do a long call then its graph is made like this

Now let's understand this here

On today's date, the spot price is 90 Rs

Assume it is 90 Rs on 29th January

And you think that this stock will go up in future

You expect that it will go up to 120 Rs in a month

That's why you lock your price before

You say that the spot price on 28 February will go up to 120 Rs

You will lock this price before

My claim is that its price will go up

So I will buy them today at 100 Rs

If you are ready to buy at 100 Rs then this is your strike price

So if the stocks are below 100 Rs

In this case, you have given only 10 Rs

Your loss will be only 10 Rs

I have plotted the strike price on X-axis

And I've plotted profit and loss on Y-axis

I will write also that this is profit and loss

So you can see here

That if the price is below 100 Rs then your maximum loss here is 10 Rs

Because you have bought an option by giving 10 Rs

If it goes above 100 Rs

Then till 110, it will be your breakeven point

Then your loss will gradually start decreasing

This is also the area of loss

After that, the gain starts after 110

The breakeven point is 110

And this portion is the gain portion

You start earning profit here

If this stock goes up to 120 Rs on 28 February, then you will earn a profit here

We have also seen some terms in this

If you want to find profit and loss then you will do spot price -strike price-premium

For the call option

Some formulas are changed in the case of a put option

We will see that in the put option video

Now we will repeat the terms that we have seen in the last video

The spot price, let's say your current share price is 100 Rs

Then we will call it at the money

This means the strike price is equal to the spot price

Loss is premium in this case

You just memorize this graph if you know this graph then you can make any formula

Whenever the strike price is equal to the spot price then you can say that this is at the money option

What is the meaning of in the money option?

That besides the strike price this option That means spot price is more than the strike price

It is 110, 120 or 130 or even it is 101

Then also it is in the money

Sorry its not at the money, I'll do it in the money

In the money means if you sold it hand in hand

Assume here it becomes 105

You'll get some money

You have to give premium that's a different thing

Maybe you'll face some loss due to the premium

If we take an example, let's say the spot price becomes 120

It becomes 120 on 20 or 25 February

Here the spot price is 120

The strike price is 100

minus premium 10

The profit you earned here is 10 Rs

This is your earned profit

But we were talking about 105 so in this case, it is in the money

It is here itself, the spot price is more than the strike price

But in this case, 105 - 100(strike price)- 10(premium)

So it is a loss for you because you are in this range

You have to cover the premium after that only you will start getting the benefit

So you just have to remember that spot price should be more than the strike price in the money

Whenever we talk about the call option

It's very simple if we take it literally, it is in the money

It will give you money hand to hand

This means spot price should be more than strike price then only it will make you money

And you have to cover the premium

Then only you'll make a real profit because you have already given its cost

Out of the money has a very simple meaning

Your spot price, as you can see it was 90 on 29 January

Or it was out of the money option

This much area left to the strike price

This is out of the money

In which your spot price is lower than the strike price

What is your maximum loss here? You can see here, the graph is that type

Your maximum loss is 10 Rs

You just have to remember the graph for the long call

I will show you the graph short call graph soon

We have already discussed breakeven

Like your getting breakeven on 110

For break-even what you have to do is add strike price and premium

Because you have to cover the cost of premium then only it will be breakeven

At a breakeven point, you will have no profit loss situation

I think we understood all the terms here

Now we will talk about the call option, we have already talked about a long call

When should you buy a call option?

You should buy the call option when you think that

Any stock,nifty, or Sensex will grow in the future

You think that they will grow after 1 month or 2 months

Or for whatever time you are buying the call option

Let's say we were seeing in this example

If you think this stock will go up to 120 or 130

Let's say it is 90 Rs on 29 January

And you think that it will

Go up to 120 or 130 till 28 February

Then you will purchase the call option

And there are chances for you to gain

And with that, your limited downside

How much is your loss?

Your loss is limited, your loss is only 10 Rs due to the premium

The premium cost you paid

So this is the benefit of long call that your downside is limited but

The upside is unlimited but at the same time you have to take a risk also

When will you do a short call?

Whoever has sold you this call option, for him this call option is short

Short means to sell

How will we make its graph?

Whoever has sold you the call option has taken 10 Rs hand to hand

And when did he take it? Let's say when the stock was 90 Rs

He took 10 Rs from you, he said I want 10 Rs benefit

I don't want anything more

I think that it will go down in the future

That means the person who is selling the call option is bearish

He thinks that whatever it is stock or underlying asset, its value will fall

As we have seen in the old example

If the owner or builder of the apartment

If he thinks that the value will drop in the future then he can sell the call option

His motive can be this also

He thinks let's say the flat is worth 50 lakh and in the future, the market will go down

It will become 45 lakh

It's better that I will sell the call option in 50,000 Rs

So at least I will earn 50,000 Rs

So the same thing is happening in the stock whoever is selling the call option

He is taking 10 Rs and after that, the market goes down

So see, what is the meaning of going down?

If it goes down to 80 Rs then also he is earning profit

He's getting at least 10 Rs but

If the market keeps going up

Then his loss can be unlimited

Here the downside is unlimited

See he is not incurring loss directly

But the potential benefit that he could get if the stock goes up to 120 or 130 Rs

Then he is getting opportunity loss of 40 Rs going to 130 from 90 Rs

So that's why it is said that the upside is limited that he will get only 10 Rs

But the downside is unlimited

So in the case of the short call, this type of graph is made

If you memorize these two graphs then you will easily understand the call option

I hope that you understood the concept of a call option after watching this video

But then also I would like to give you a warning

If you deal in options or want to deal

See, options are zero some game

The more people make a profit,

The more people incur a loss

You don't know which side you will end up at last

You can decide this with your knowledge

The more knowledge you have

The more chances you have that you will make a profit in this

I want that after watching this video, you will keep increasing your knowledge

Related to options

If you want to deal with this

But yes,

Options can help you to

Minimize risk in your business and finance as we have seen the daily life example

If you know this concept then you can utilize it properly

So in this video, we understood the call option in details

We will discuss the put option in the coming video

So make sure to watch that video

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