What Are CE and PE in Options Trading?
As India continues its economic growth, the stock market has become increasingly attractive place for both investors and traders. While the equity market is known for long-term investing, where people often hold stocks for years to build wealth, many traders focus on the futures and options markets for quicker returns. These markets attract those who want to capitalize on short-term price fluctuations, offering opportunities to profit regardless of whether prices rise or fall.
F&O traders employ strategies designed to predict near-future price changes, which can lead to substantial gains in a short period. Unlike equity investing, which typically requires patience and a long-term perspective, futures and options trading is viewed as a way to make faster, more frequent trades, though it also carries higher risk.
As a result, F&O traders need a strong understanding of market trends, risk management, and technical terms like CE, PE, lot size, strike price, and others.
Understanding CE and PE in Options Trading
In futures and options trading, traders often use two key terms: CE and PE. These technical terms refer to Call Options (CE) and Put Options (PE), which are essential components of options trading strategies. Let’s understand these in detail:
What Is a Call Option & How Does It Work?
A call option is an agreement that provides the purchaser with a right, but not an obligation, to purchase a property at a specific strike price on or before a given expiry date. The purchaser pays a premium for this right, which is received by the seller. In the event that the purchaser exercises the option, the seller is obligated to sell the property at the specified strike price.
Call options are commonly used for speculation and hedging. Traders may buy calls if they expect the asset price to rise, allowing them to control a larger value with less capital. Alternatively, calls can protect a short position in the underlying asset.
If you’re planning to trade call or put options, ensure you open a free demat account online — it’s quick, paperless, and essential for executing and holding option contracts.
In equities, one option contract usually represents a fixed number of shares, often 100. For example, if a stock is priced at ₹100 and a trader buys a call option with a strike price of ₹120 for a premium of ₹5 per share, the trader can buy the stock at ₹120 before expiry. If the stock rises above ₹120, the option gains value. If it stays below ₹120, the option expires worthless, and the buyer loses only the premium paid.
Call options are options, and their value is based on the price of the underlying asset, which gives investors flexibility and risk management.
How to Calculate Call Option Payoffs?
A call option payoff shows the profit or loss for buyers and sellers, based on the strike price, option premium, and spot price at expiry.
Buyer: Loss is limited to the premium paid, while profit can be unlimited if the stock price rises above the strike price.
Payoff = Spot Price − Strike Price
Profit = Payoff − Premium Paid
Seller: Profit is limited to the premium received, but losses can be unlimited.
Profit/Loss = Premium Received − (Spot Price − Strike Price)
Example: For Reliance Industries, stock price ₹1,953, strike price ₹2,000, premium ₹57.15, lot size 505 shares: if the price rises above ₹2,000, the buyer profits; otherwise, the loss is limited to the premium.
Call option payoffs help investors assess potential gains and risks.
What Is a Put Option & How Does It Work?
A put option is a financial contract that gives the buyer the right, but not the obligation, to sell an underlying asset at a predetermined strike price on or before a specified expiry date. The buyer pays a premium to acquire this right, which is received by the seller. If the buyer exercises the option, the seller must buy the asset at the agreed strike price.
Investors use put options mainly for speculation and hedging. Traders buy puts to profit when they expect the asset’s price to decline. Conversely, puts help protect a long stock position against potential losses, serving as a form of insurance.
The value of a put option increases as the underlying asset’s price falls. If the asset price remains above the strike price at expiry, the option typically expires worthless, and the buyer loses only the premium paid.
Put options can be combined with call options and futures contracts to build simple risk-protection strategies or defined-risk positions. By understanding put options, investors can manage risk, gain from downward price movements, and safeguard existing holdings efficiently, making them a versatile tool in both trading and portfolio management.
How to Calculate Put Option Payoffs?
The payoff of a put option indicates the potential profit or loss for buyers and sellers, based on the strike price, spot price, and premium.
For the buyer:
Payoff = Max(0, Strike − Spot)
Profit = Payoff − Premium Paid
If the spot price is below the strike at expiry, the put is “in the money” and has value. If the spot price is equal to or above the strike, the payoff is zero, and the loss is limited to the premium.
For the seller:
Payoff = −Max(0, Strike − Spot)
Profit = Premium Received + Payoff
If the option expires worthless, the seller retains the premium. If the spot price falls well below the strike, the seller’s losses can be substantial.
Calculating put payoffs helps investors plan strategies, manage risk, and evaluate potential returns.
Both CE and PE are derivatives, meaning their value is derived from the performance of the underlying asset. They are commonly used for hedging and speculative trading.
Types of Strike Price Call & Put Options
Options are classified by the relationship between the spot price and the strike price:
- In the Money (ITM): Call ITM when the spot is above the strike; Put ITM when the spot is below. ITM options have intrinsic value.
- At the Money (ATM): The spot price is very close to the strike price.
- Out of the Money (OTM): Call OTM when the spot is below the strike; Put OTM when the spot is above.
ATM and OTM options largely contain time value, which dwindles as expiry is near. Selecting the strike price determines possible profit, risk, and premium amount.
Basic Terms Relating To Call And Put Options
Understanding basic terms of Call and Put Options is essential before trading in options.
- Spot Price: The current market price of the underlying asset.
- Strike Price: The fixed price at which the asset can be bought (call) or sold (put) under the contract.
- Option Premium: The non-refundable cost paid by the buyer to the seller for acquiring the option.
- Expiry: The last valid date of the option contract.
- Lot Size: The number of units included in one option contract.
- Settlement: The method of closing the contract at expiry, usually in cash in India.
Knowing these terms helps investors read option quotes and plan trades effectively.
Differences Between CE and PE
| Aspect | Call Option (CE) | Put Option (PE) |
|---|---|---|
| Objective | Profit from a price increase | Profit from a price decrease |
| Buyer’s Right | Right to buy the underlying asset | Right to sell the underlying asset |
| Market Sentiment | Bullish | Bearish |
| Risk for Buyer | Limited to the premium paid | Limited to the premium paid |
| Risk for Seller | Unlimited | Unlimited |
| Profit Potential | Unlimited | Significant but capped |
Call Option – Expiry (Buying)
If the spot price exceeds the strike at expiry, the call is in the money. The buyer purchases at the strike and gains the price gap minus the premium. If the spot is at or below the strike, the option expires worthless, and the premium is the only loss.
Call Option – Expiry (Selling)
When the spot is at or below the strike, the sold call expires worthless and the seller keeps the premium. If the spot rises above the strike, the seller must sell at the strike and faces losses that grow as the spot climbs, offset slightly by the premium.
Put Option – Expiry (Buying)
If the spot is below the strike, the put is in the money, letting the buyer sell at the strike and gain the difference minus the premium. Otherwise, it expires worthless, and the loss equals the premium.
Put Option – Expiry (Selling)
If the spot is at or above the strike, the sold put expires worthless and the seller keeps the premium. A lower spot forces purchase at the strike, creating losses reduced only by the premium.
Role of Put-Call Ratio (PCR) in Options Trading
Put-Call Ratio (PCR) is a commonly used indicator in options trading, calculated by dividing the total number of traded put options by the total number of traded call options.
For example:
PCR = Put Volume / Call Volume (Volumes would be used on a particular day)
PCR = Total Put Open Interest / Total Call Open Interest (Put Open Interest and Call Open Interest would applied on a specific day)
F&O Traders use Put Call Ratio to identify potential market reversals and assess whether the market is oversold or overbought.
Points to Consider While Analyzing Put-Call Ratio
- PCR below 1: A PCR below 1 means that more call options are being traded than put options. This is often interpreted as a sign that traders expect prices to rise, reflecting a bullish outlook. Increased activity in call options suggests that traders are betting on price increases.
- PCR above 1: A PCR above 1 indicates that more put options are being traded than call options. This suggests that traders are expecting a price decline or using put options to hedge against a potential downturn in the market. Higher activity in put options implies that traders are betting on a price drop.
- PCR = 1: When the Put-Call Ratio (PCR) is exactly 1, it suggests a neutral market sentiment. This balance indicates that the market is in a state of equilibrium, with no clear consensus on the direction of price movement, and traders are uncertain about the market’s next move.
Benefits of Investing in Options
- Investing in options allows traders to potentially earn profits from both rising and falling markets, providing more flexibility compared to traditional stock investing.
- Options can be used to hedge against potential losses in other investments, offering a way to manage risk more effectively.
- They require a smaller initial investment compared to buying stocks outright, which can lead to higher leverage and the opportunity for greater returns.
- Investors can use various strategies with options, such as covered calls or protective puts, to enhance their portfolio’s performance and manage risk.
Risks Associated with Call and Put Options
- Options trading carries the risk of losing the entire premium paid if the market does not move as expected before the option expires.
- Market volatility can cause sudden and unpredictable price movements, increasing the difficulty of timing trades accurately.
- Leverage in options can amplify losses, making it a high-risk choice for inexperienced traders.
- The time decay of options erodes their value as expiration approaches, potentially resulting in losses even if the market moves favorably.
Frequently Asked Questions
It depends on market direction. Buy a call if you expect prices to rise. Buy a put if you expect prices to fall.
CE means Call Option, which gives the right to buy. PE means Put Option, which gives the right to sell the underlying asset at the strike price.
Yes, options can be sold before expiry in the secondary market. Traders often do this to take profits or limit losses before the contract ends.
Risk depends on the position. Buying calls or puts limits the risk to the premium. Selling calls or puts is riskier because potential losses can be very large.
Implied volatility reflects demand. Calls may be priced higher if investors expect price increases. Puts can be more expensive if there is a fear of market declines.
In most equity markets, one call option represents 100 shares. In India, lot sizes vary by stock and are determined by the exchange and regulator.