The securities market has several options for investors to choose from. Whilst shares and debentures are the most commonly known securities; the relatively lesser-known derivatives are also dynamic securities. One of the major types of derivative contracts is an options contract.
Published on 01 March 2023
OPEN A FREE* DEMAT AND TRADING ACCOUNT
IN 15 MINS*
What is an Options Contract?
An options contract is a type of derivatives contract which confers upon the option holder the right to purchase or sell the underlying asset at a preset price on a pre-decided date in the future.
It is important to understand that an options contract only offers the buyer the right to buy or sell the underlying asset as per the terms of the contract, not an obligation to do so, and the buyer of an options contract is referred to as the options holder.
What is Call Writing in an Options Contract?
There are several option writing strategies available for investors, one of which is call writing. Writing a call option, also referred to as call writing, is the process of entering into a contract to purchase or sell a certain underlying asset at a specific price on or before a specified date in the future.
Writing a call option makes the call writer obligated to honour the buy/sell contract if the option holder chooses to exercise the contract. In exchange for call writing, the call writer charges a sum which is termed as premium. This premium is one of the main driving forces for a call writer to enter into a binding buy/sell contract for a particular security.
If the option holder decides not to exercise their buy/sell option, the call writer retains the premium. Call writing options is, thus, an interesting strategy applied in the trading of derivatives. However, it is important to note that call writing options for shares are usually written in multiples of lots of shares, with each lot typically comprising 100 shares. Also Read: Bear Put Spread Strategy in Options Trading
How does Call Writing in an Options Contract work?
Let us understand how call writing works with the help of an example. Trader A, who has 10,000 shares of Company X, decides to write a call option to offer the option buyer (Trader B) the right to buy the shares at a strike price of ₹10 each after three months.
After the period of three months expires, the option holder can exercise their right to buy the aforementioned shares at the predetermined strike price. As consideration for writing this call, Trader A charges a premium of ₹12,000.
If Trader B decides to exercise their option and purchases the shares at a strike price of ₹10, the options contract shall be considered completed. This is likely to happen if the market price of the underlying shares after three months is higher than the strike price of the options contract, that is, higher than ₹10. Exercising the buy option would, thus, be profitable for Trader B.
If, however, the market price of the underlying shares after three months is lower than the strike price of ₹10 as decided in the options contract, Trader B may choose not to exercise the option to buy. In such a scenario, Trader A'a profit from writing a call option shall be the premium of ₹12,000, and the same amount shall be Trader B's loss of buying the call option.
Benefits of Call Writing
There are several benefits of call writing, some of which have been mentioned below.
The call writer receives an immediate income in the form of a premium.
In the event of the options contract expiring, the call writer retains the premium amount without having to engage in any actual trading of the underlying asset.
The call writer has the option to buy back the options they have written from the open market.
Owing to the time decay associated with options contracts, the call writer enjoys a decline in their risk as the time to exercise the option draws nearer.
To Sum it Up
The options writing strategy of call writing is highly useful in the derivatives market. However, it must be applied only after careful consideration and thorough research Also Read: What is covered call in Option Trading?
Team Espresso
We care that you succeed
Bringing readers the latest happenings from the world of Trading and Investments specifically and Finance in general.
Options are derivatives in the trading strategy that are amongst the most popular tools for traders in the stock markets. This is because the price of the options can move very fast, thereby making the investors lose or make a lot of money quickly. Options strategies can range from complex ones to simple ones, with several payoffs, and at times with odd names.
Futures are used in the different stock markets to guard against price volatility. For investors who wish to take advantage of the price volatilities in the market, investing in stock futures can be the best solution. A futures contract provides a buyer or a seller with the right to buy or sell an asset at a specified future price.
Futures and options trading was introduced in Indian stock exchanges in 2000. Futures and options are known as derivatives because they derive their value from an underlying asset. However, the two are not the same. Futures trading differs from options trading in some ways.
The major risk associated with writing a call option is the movement of the potential movement of the market price of the underlying asset in a direction that is not favourable to the call writer. This can happen in one of the following ways.
When the call writer has written an options contract to sell an underlying asset and the market price at the time of the expiration of the contract (say ₹10 per share) ends up being higher than the strike price of the contract (say ₹8 per share), thereby leading to a loss for the call writer;
When the call writer has written an options contract to buy an underlying asset and the market price at the time of the expiration of the contract (say ₹10) is lower than the strike price of the contract (say ₹12), it causes the call writer a loss.
By writing a call option, a call writer enjoys the benefit of the immediate receipt of a premium amount. This amount can be retained even if the options contract is not exercised by the option holder. Call writing enables a trader to benefit from a decreasing risk due to the time decay of options contracts. Furthermore, there is a significant amount of flexibility associated with call writing since the call writer can buy back their options from the open market should they so desire.
Related Articles
What Are The Best Options To Trade For Beginners?
Options are derivatives in the trading strategy that are amongst the most popular tools for traders in the stock markets. This is because the price of the options can move very fast, thereby making the investors lose or make a lot of money quickly. Options strategies can range from complex ones to simple ones, with several payoffs, and at times with odd names.
Futures are used in the different stock markets to guard against price volatility. For investors who wish to take advantage of the price volatilities in the market, investing in stock futures can be the best solution. A futures contract provides a buyer or a seller with the right to buy or sell an asset at a specified future price.
Futures and options trading was introduced in Indian stock exchanges in 2000. Futures and options are known as derivatives because they derive their value from an underlying asset. However, the two are not the same. Futures trading differs from options trading in some ways.
The major risk associated with writing a call option is the movement of the potential movement of the market price of the underlying asset in a direction that is not favourable to the call writer. This can happen in one of the following ways.
When the call writer has written an options contract to sell an underlying asset and the market price at the time of the expiration of the contract (say ₹10 per share) ends up being higher than the strike price of the contract (say ₹8 per share), thereby leading to a loss for the call writer;
When the call writer has written an options contract to buy an underlying asset and the market price at the time of the expiration of the contract (say ₹10) is lower than the strike price of the contract (say ₹12), it causes the call writer a loss.
By writing a call option, a call writer enjoys the benefit of the immediate receipt of a premium amount. This amount can be retained even if the options contract is not exercised by the option holder. Call writing enables a trader to benefit from a decreasing risk due to the time decay of options contracts. Furthermore, there is a significant amount of flexibility associated with call writing since the call writer can buy back their options from the open market should they so desire.
Sharekhan Comtrade Private Limited (TM) operates the web site accessible from the URL www.myespresso.com (the “web site”').
Sharekhan Comtrade Private Limited is committed to protecting your privacy and utilising technology that gives you the most powerful, safe, online experience that you can get anywhere else.
Sharekhan Comtrade Private Limited does, however, gather certain information that is provided by you to the Web Site. Sharekhan Comtrade Private Limited believes that by collecting this information Sharekhan Comtrade Private Limited is able to provide you with a personalised web experience, and to assist its own sales team and advertisers in efficiently reaching an appropriate audience.Sharekhan Comtrade Private Limited does, however, gather certain information that is provided by you to the Web Site. Sharekhan Comtrade Private Limited believes that by collecting this information Sharekhan Comtrade Private Limited is able to provide you with a personalised web experience, and to assist its own sales team and advertisers in efficiently reaching an appropriate audience.
Sharekhan Comtrade Private Limited requests the minimum information it believes necessary to achieve this goal.
The following discloses Sharekhan Comtrade Private Limited's information gathering and dissemination practices for the Web Site:
System Data:
Sharekhan Comtrade Private Limited uses your IP address to help diagnose problems with our server and to administer the web site. Your IP address is used to identify you and your shopping cart and to gather broad demographic information.
Registration Data:
The Web Site's registration form may require users to give us contact information (like their name, phone number and e-mail address), unique identifiers (like their PAN Number) and demographic information (like their pin code, age or income level). The Web Site uses customer contact information from the registration form to send the users information about Sharekhan Comtrade Private Limited and promotional material from some of Sharekhan Comtrade Private Limited's partners. The customer's contact information is also used to contact the visitor when necessary. Unique identifiers (such as PAN numbers) are collected to verify the user's identity. Demographic and profile data is also collected at the Web Site. We use this data to tailor the visitor's experience at the Web Site, showing them contents that we think they might be interested in, and displaying the contents according to their preferences. This information is shared with advertisers on an aggregate basis.
Links and Co-Branded Sites:
This site contains links to other Web Sites which are not necessarily been screened or reviewed by www.myespresso.com. Sharekhan Comtrade Private Limited is neither responsible for the privacy practices or the contents of such Web Sites nor shall be held answerable for the inaccurate, inappropriate or offensive data, material, information, products and services that may be viewed on those sites.
Sharekhan Comtrade Private Limited may operate a number of co-branded sites. Policies regarding information collection and sharing may differ on some of these co-branded sites. If you have any particular questions, you should check the privacy statement that appears on each co-branded site.
Order Forms:
The Web Site uses an order form for customers to request information, products and services. The Web Site collects visitors' contact information (like their mobile number or e-mail address), unique identifiers (like their PAN number) financial information (like their account or credit card numbers) and demographic information (like their pin code, age or income level). Contact information from the order form is used to send orders, information about Sharekhan Comtrade Private Limited, and promotional material from some of Sharekhan Comtrade Private Limited's partners to the visitors of the Web Site. The visitor's contact information is also used to get in touch with the visitor when necessary. Financial information that is collected is used to check the users' qualifications and bill the user for products and services. Unique identifiers (such as PAN numbers) are collected from Web Site visitors to verify the user's identity.
Surveys and Contests:
The Web Site's online surveys ask visitors for contact information (like their mobile number or e-mail address) and demographic information (like their pin code, gender, age or income level). The Web Site uses contact data from its surveys to send the user information about Sharekhan Comtrade Private Limited and promotional material from some of Sharekhan Ltd.'s partners. The customer's contact information is also used to contact the visitor when necessary. Users may opt-out of receiving future mailings; see the choice/opt-out section below. Demographic and profile data is also collected at the Web Site. The Web Site use this data to tailor its visitor's experience at the Web Site, showing them content that it thinks they might be interested in, and displaying the content according to their preferences. This information is shared with advertisers on an aggregate basis.
Sharekhan Comtrade Private Ltd run contests on the Web Site in which we ask visitors for contact information (like their e-mail address). Sharekhan Comtrade Private Limited uses contact data from its contests to send users information about Sharekhan Comtrade Private Ltd. and promotional material from some of our partners. The customer's contact information is also used to contact the visitor when necessary. Users may opt-out of receiving future mailings; see the choice/opt-out section below.
Third-Party Advertisement Servers:
Sharekhan Comtrade Private Limited engages the services of an outside advertisement company to display advertisement on the Web Site. These advertisements may contain cookies. While Sharekhan Comtrade Private Limited uses cookies in other parts of the Web Site, cookies received with banner advertisements are collected by the Advertisement company, and Sharekhan Comtrade Private Limited does not have access to this information.
Protection of your Data and Information:
The privacy and protection of your data and information provided to us is of vital importance. Sharekhan Comtrade Private Limited shall ensure to safeguard the security and confidentiality of any information you share with us. Any personally identifiable information of the customers obtained by us shall not be used or shared other than for the purposes to which the customers consents. However security and confidentiality of information cannot be guaranteed cent percent. Hence despite our utmost efforts to protect your personal information, Sharekhan Comtrade Private Limited and www.myespresso.com cannot warrant the security of any information you transmit to us through our online services. Such transmission of your personal information is done at your own risk.
Disclosure of Customer Information :
Sharekhan Comtrade Private Limited and www.myespresso.com shall not deliberately disclose customer's personally identifiable information to any unauthorized third person, save and except where such information shall be disclosed in good faith and for the purpose of law for the time being in force or to protect the rights and property of Sharekhan Comtrade Private Limited and www.myespresso.com.
Public Forums :
The Web Sites makes chat rooms, forums, message boards and/or news groups available to its users. Please remember that any information that is disclosed in these areas becomes public information and you should exercise caution when deciding to disclose your personal information.
Supplemental Information :
The Web Site supplements the information that you provide with information that is received from third parties.
The Web Site DOES NOT entice by the prospect of a special game, prize or other activity, to divulge more information than is needed to participate in the activity.
Further to the above, in light of the recently notified Information Technology (Reasonable security practices and procedures and sensitive personal data or information) Rules, 2011. (Hereinafter referred to as the Rules)
The following shall be deemed to be sensitive information :
Password;
Financial information such as Bank account or credit card or debit card or other payment instrument details;
Physical, physiological and mental health condition;
Sexual orientation;
Medical records and history;
Biometric information;
Any detail relating to the above clauses as provided to body corporate for providing service; and
Any of the information received under above clauses by body corporate for processing, stored or processed under lawful contract or otherwise:
provided that, any information that is freely available or accessible in public domain or furnished under the Right to Information Act, 2005 or any other law for the time being in force shall not be regarded as sensitive personal data or information for the purposes of Rules.
Collection of Information:
Compliance with KYC guidelines as per SEBI / Exchanges / Or any other Act, law or regulation requiring the same and any internal KYC guidelines formulated by Sharekhan Comtrade Private Limited.
In order to provide enhanced trading experience to the client.
In order to provide any further information to be provided to regulators.
Such information may be collected in a manner that the client is always aware of the collection and purported usage of the same. The client shall have an option to withdraw consent to share the information. However such intimation shall be required in writing. Such intimation shall only be taken into account from the date on which the same is received. Sharekhan Comtrade Private Limited may choose to stop services to such a client in case such intimation is received. Such information shall only be used for the purpose it is collected.
Clients would be allowed an option not to disclose any information to be collected, provided the same is in compliance with regulatory requirements.
Disclosure of information:
Disclosure of sensitive information would be as per the terms agreed by the clients. For any change in such terms, the clients would be informed.
Provided no consent may be required in case the same is being shared as per compliance guidelines or as required by regulators.
Any information being disclosed to third parties would be in accordance with the Rules and would be done provided such third party has the same level of compliance guidelines as Sharekhan Comtrade Private Limited.
Sharekhan Comtrade Private Limited shall allow clients to review their personal information and the same shall be allowed to be edited provided exchange guidelines relevant to the same are followed.
Sharekhan Comtrade Private Limited shall maintain reasonable security practices and procedures and maintain a comprehensive documented information security programme. In the event of an information security breach, Sharekhan Comtrade Private Limited or a person on its behalf shall be required to demonstrate as and when called upon to do so by the agency mandated under the law, that there have implemented security control measures as per their documented information security programme and information security policies and information security policies that contain managerial, technical, operational and physical security control measures that are commensurate with the information assets being protected with the nature of business.
KYC Languages
Download Client Registration Documents (Rights & Obligations, Risk Disclosure Document, Do's & Don't's) in Vernacular Language :
Note: "This document is a translated version of the client registration documents in English and is being provided in vernacular language to facilitate better understanding by the investors. In case of any ambiguity, the contents of the English version would prevail."
NDNCR Terms & Conditions
By accepting the Terms & Conditions, you authorise Espresso, its representatives and agents to provide information about various products, offers and services provided by Espresso through any mode, including telephone calls, SMSes, emails, letters and any other mode of communication. You also confirm that laws in relation to unsolicited communication referred in "National Do Not Call Registry" as laid down by "Telecom Regulatory Authority of India" will not be applicable for such information/communication.
Filing Complaints on SEBI Complaint Redress System (SCORES) - Easy and Quick
Register on the SCORES portal
Mandatory details for filing complaints on SCORES:
Name
PAN
Address
Mobile Number
Email ID
Benefits:
Effective communication
Speedy redressal of grievances
You can file complaints on SCORES through https://scores.gov.in/scores/Welcome.html
