Table of contents
- What is CE in the stock market?
- When should you buy or sell a CE or call option?
- What is PE in the stock market?
- When to buy or sell A PE or put option?
- Difference between CE and PE in the stock market
- How to calculate the CE and PE ratio with the formula?
- Trading strategies for CE and PE options
Did you know that the stock market is mostly associated with long-term investment? While this may be true, various traders also buy and sell options and futures for short-term gains. This market sector offers the advantage of quick money but also carries a significant risk. However, options trading has certain benefits, such as increased profits, multiple risk-hedging strategies, cost efficiencies, etc.
Even people with financial experience find the options trading market challenging. Beginners might be willing to know what CE and PE are. However, it is essential to understand what is an option. The option mainly refers to the contracts that give the holder a right but not responsibility to sell or purchase a specific amount of an underlying security. This will likely occur at a certain strike price on or before the given date. It is usually dependent on the design of the option. So, before you start options trading, familiarize yourself with some crucial terms like what are CE and PE.
You’ve probably heard options traders often use the terms CE and PE. The CE and PE full forms are the Call and Put options. Let’s look at them more closely.
What is CE in the stock market?
The call option refers to any agreement that allows investors to invest a certain amount of stock at a specific price, also known as the strike price. This occurs at a particular time frame or expiration date. For this privilege, the buyer must pay the premium to a seller. Investors may expect the stock price to rise higher than the strike price with the call option. Suppose this instance occurs, they may choose to buy stocks at a set price. Contrarily, if the stock price is below the strike price or keeps falling further, the call option will expire without value, leading to a loss of the premium paid.
When should you buy or sell a CE or call option?
When you believe the underlying asset’s price will rise, you can purchase a call option. The need is that the stock is in the news for whatever reason, whether it’s an approaching quarterly report or a merger with another firm, for example. The most challenging aspect of purchasing CEs is determining when to sell them. You are under no obligation to stay if your expectations are not satisfied.
When the underlying asset’s price has risen sufficiently over the strike price, you can sell your CEs or Call options. But if the underlying asset’s price has fallen sufficiently far below the strike price, you can sell your call options before expiration. A limit order is the best way to buy CEs. This lets you place an order at a particular price or even better than that.
What is PE in the stock market?
The put option refers to a contract that allows investors to sell a certain number of stocks at an established or strike price by the expiration date. Similar to call options, the put options usually involve a premium paid to the seller by the buyer. Those who buy put options hope the stock price will fall below the strike price. If so, they can choose to sell their shares at the pre-set price. If the stock price remains above the strike or rises higher, the put option will expire without any value, causing them to lose the premium paid.
When to buy or sell A PE or put option?
You must be bearish on the underlying asset to purchase a Put Option. It’s also preferable if the market is declining or if there are multiple grounds to predict its prices to fall.
If your forecast is accurate and the share price falls, you will earn from Put Options. However, remember that there is always an inherent risk in purchasing Put Options because you are only required to retain them if your predictions are correct.
So, the ideal strategy is to buy Put Option contracts with a limit order, which implies you may put an order at a set price or better, and also use sell-stop orders when selling Put options, which means the share is automatically sold when it hits that level.
Difference between CE and PE in the stock market
The following table will give you an overview of the difference between PE and CE:
|Call Option (CE)
|Put Option (PE)
|It gives the holder the right to buy stocks
|It gives the holder the right to sell stocks
|Profit from a rise in the stock price
|Profit from a fall in the stock price
|Buyer’s and Seller’s Position
|The buyer’s position is Bullish, while the seller’s position is Bearish.
|The buyer’s position is Bearish, while the seller’s position is Bullish.
|There is no obligation to buy
|There is no obligation to sell
|Determines the buying price (above the current market price)
|Determines the selling price (below the current market price)
|Paid by the call option buyer to the seller
|Paid by the put option buyer to the seller
|Risk and Reward
|Limited risk (premium paid) with unlimited reward potential
|Limited risk (premium paid) with unlimited reward potential
How to calculate the CE and PE ratio with the formula?
Understanding what CE and PE are in the stock market entails two techniques of calculation: one based on volumes traded and the other on open interest.
PCR = Put Quantity / Call Quantity
PCR = Net Put Open Interest / Net Call Open Interest
The PCR indicates the proportion of put options traded or open at a certain time. If the ratio is 0.7, showing 1,250 puts and 1,785 calls exchanged, the call trading volume is considerably greater.
The ratio can rise without requiring a considerable increase in put purchases if the denominator (call options) falls. Extreme PCR levels frequently indicate market mood, which can be overly optimistic or negative.
Trading strategies for CE and PE options
So, now you know what CE and PE are in the stock market. Therefore, different strategies may help produce more money while taking fewer risks. Here are a few examples:
- Covered Call Strategy: A covered call strategy involves purchasing or holding stock and selling calls on the same number of shares. Investors receive a premium for selling the option and may profit from the transaction.
- Protective Put Strategy: A defensive set position is when you acquire (or already hold) stock and buy put options on the same number of shares. It can assist the investor in avoiding potential losses while also allowing them to achieve prospective gains.
- Straddle Strategy: A neutral options strategy is purchasing a put option and a call option for the same underlying securities with the same strike price and expiration date. This can be useful if the investor believes the stock will fluctuate since they can profit no matter what happens.
So, now you know what is CE and PE in the stock market. The two forms of option contracts accessible on the market are CE and PE or call-and-put options.
The primary goal of purchasing a Call Option is to profit from rising share prices. In contrast, others buy Put Options if they are bearish on a certain company or commodity and believe its price will fall within a specific time frame.
Another incentive to buy these options is to hedge your positions, which will help you survive in a down market.
A call option is a financial contract that provides the investor the right, but not the obligation, to buy a specific quantity of a stock at a fixed price (strike price) within a specified time frame. It’s like making a reservation to buy a stock at a set price in the future.
Yes, options trading involves some type of risk. This means, if the market doesn’t move as expected, investor may lose the entire premium paid for the option. That’s why it’s important to know the risks involved and only invest when you can afford to lose your capital.
Yes, options can be purchased and then sold any time before they get expire. The reason is the market price of options fluctuates time to time based on factors such as the stock price, market volatility and time remaining until expiration.
The strike price is the predetermined price at which the underlying asset can be bought or sold.