[Derivative ABC] What Are 'Call Option' and 'Put Option'?

[Asia Economy Reporter Ji-hwan Park] In the derivatives market, an 'option' refers to a right. It means that if certain conditions are met, one may choose to exercise it, and if not, one may choose not to. This is different from an 'obligation' that must be exercised if conditions are met.

There are call options and put options. Call means "to call" or "to bring in." Put means "to put," "to let in," or "to send out."

First, a put option contract means trading the right to sell an underlying asset at a predetermined price at a specific future time. The put option buyer can exercise this right to sell at a higher price if the market price of the asset falls below the specified price. If the market price is higher than the specified price, the buyer can simply choose not to exercise the right.

Buying a put option profits when the index falls, and theoretically, the profit can be unlimited. On the other hand, the seller, who issues the right to sell at a certain price, can face unlimited losses if the index falls.

A call option, simply put, is the right to buy. For example, if there is gold worth 100,000 won and someone issues the right to buy it at 80,000 won, that right is worth 20,000 won. The call option buyer profits more as the gold price rises because they have the right to buy at 80,000 won.

Usually, call options are based on the KOSPI 200 index. The call option buyer can gain unlimited profits as the index rises. Conversely, from the seller's perspective, since they sold the right to buy at a certain price, if the index suddenly rises sharply, their losses can increase infinitely.

This content was produced with the assistance of AI translation services.