Before delving into the concept of CE and PE, let’s first grasp the fundamentals of options trading. In this post, we have explained What is CE and PE in stock market in depth.
Even those with a background in finance find the options trading market to be bewildering. Before making money from it, one needs to comprehend many technical words like “CE,” “PE,” “lot size,” “Strike price,” and others. Investors in this market area think they can make money quickly. However, it is the same sector where one loss is sufficient to wipe away all of the capital invested. People are motivated by rags-to-riches tales they have heard. But they fail to remember that stories of people going from riches to poverty are more often than vice versa. Therefore, it is important to fully understand terminologies like CE and PE before diving into the realm of options trading. The same will be understood in this article.
What is CE in Stock Market
The abbreviation for call options is CE. The acronym CE, however, refers for Call European. In essence, call options are wagers on whether the price of an asset will increase. With the use of call option contracts, investors can profit if the price of the underlying stock, bond, commodity, or other asset increases before the option’s expiration date. The most fundamental kind of asset is a share, bond, or commodity. The call buyer makes money when the value of the principal asset rises. Call options give investors the opportunity to purchase a predetermined number of shares at a predetermined price before a particular date, or the contract’s expiration date.
For instance, if you believe that the stock XYZ, which is currently trading at Rs. 100, will increase in value and you want to sell the shares at a higher price in the future, purchasing one call option contract gives you the right but not the obligation to purchase the number of shares specified in that specific contract.
The stock must therefore close above your buying strike price at the contract’s expiration in order for your CE or Call Options to benefit.
What is PE in Stock Market
Put European is referred to as PE, the abbreviation for Put Options.
The exact opposite of a call option is a put option. An agreement known as a “put option” grants you the right, but not the responsibility, to sell an asset at a defined price before a particular date.
One can purchase Put options for any stock or commodity if they are bearish on it and believe that its prices will decline in the future.
It’s wonderful news if your prediction comes true because you already purchased Put Options, whose premium rises if the share price drops.
The premium on your put options will decrease if share prices increase as opposed to decline, and it will become zero at expiration if the stock closes over your buying strike price.
For instance, if you believe that the value of ABC’s shares will decline, you can purchase one Put Option contract at the current strike price.
Therefore, if the stock closes below your selling strike price at expiration, your put options will profit you.
What are CE and PE’s Secondary Goals
Hedging your positions is one of CE and PE’s other goals. Consider that your Demit account contains certain shares of a specific stock. If suddenly there is any negative financial news, it will impact the entire stock market.
Therefore, you have two options to stay alive in this bear market: sell some call options or buy some put options. Both purchasing a Put option and selling a Call option will give you some protection on the short side and serve as share insurance.
By hedging your positions, you will be protected from any potential losses brought on by the market’s significant price fluctuations.
Meaning Of ITM and OTM Call Options
When it comes to possibilities, this categorization is crucial. Call options that are in the money (ITM) are those whose market price is greater than their strike price. When the market price of a call option is less than the strike price, the option is said to be out of the money (OTM). If Infosys’s stock price is Rs. 1000, then 980 call options are in the money and 1020 call options are out of the money.
Difference Between CE and PE
In exchange for a premium paid to the seller or writer of the option contract, a call option grants its holder or buyer the “right to acquire” a certain asset at the predetermined price, or the striking price, on or before the expiration date.
In exchange for a premium paid to the seller or writer of the option contract, a put option grants its holder or buyer the “right to sell” a specific asset at the predetermined price, or the striking price, on or before the expiration date.
In this blog you learned What is CE in stock market And What is PE in Stock Market call option (CE) market becomes profitable as the price increases. and put option (PE) market becomes profitable as the price decrease.