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To answer this question, let’s understand Options and Call and Put Options.
An Option is a contract that gives the right, but not an obligation, to buy or sell the underlying on or before the stated date and at a stated price. The party taking a long position i.e. buying the option is called buyer/ holder of the option and the party taking a short position i.e. selling the option is called the seller/ writer of the option.
While the buyer of options pays the premium and buys the right, the writer/seller of options receive the premium with the obligation to sell/ buy the underlying asset if the buyer exercises his right.
Options is categorized into two main types:
Options contract that gives the buyer the right to buy the underlying asset at the strike price at any time up to the expiration date is called Call Options.
Options contract that gives the buyer the right to sell the underlying asset at the strike price at any time up to the expiration date is called Put Options.
The buyer of an option is said to be long on option. As he/she would have a right and no obligation with regard to buying/ selling the underlying asset in the contract, he needs to pay the premium.
Seller of an option is said to be “short on option”. As he/she would have an obligation but no right with regard to selling/buying the underlying asset in the Contract, his potential loss is theoretically unlimited. Seller of the options receives the premium but he has to pay the margin on his position as he has an obligation and his losses can be huge.
It is possible in two scenarios. Either you are the buyer of a Put Options or the seller of the call options. Let’s see both the scenarios.
If you are a buyer of Put options then to sell 1 lot of Banknifty or Long Put on Banknifty, you need to pay premium money at the time of buying the Put Options.
If you are the seller of call options or Short Call on Bank Nifty, you have the obligation to sell Bank Nifty on expiry if buyers exercise his right. You take a premium from the buyer and pays the margin money.