CE and PE in stock market are option trading terms, CE means Call Option and PE means Put Option. The complete concept will be explained with examples further.
In this article we have explained CE and PE in the stock market in detail, before diving into the concept of CE and PE, let’s understand the basics of Options trading.
Options trading is a confusing segment in the investing world, even for people with a finance background. There are various technical terms like ‘CE’, ‘PE’, ‘lot size’, ‘Strike price’, and the rest which one needs to understand before making money out of it.
It is a segment where investors believe that money can be made quickly. But it is also the same area where one loss is enough to wipe out all the invested capital. What inspires people is the rags-to-riches story they have heard of.
But they forget that there are more riches-to-rags stories rather than the other way around. Hence before jumping into the world of options trading, terms like CE and PE need to be thoroughly understood. In this article, we’ll understand the same.
Something on option premiums and the strike price
Premium is the money required to be paid by the option buyer to the option seller/writer. Against the premium payment, the option buyer buys the right to exercise his desire to buy (or sell in case of put options) the asset at the strike price upon expiry. Option premiums play an extremely crucial role when it comes to trading options.
The strike price is the price at which the option buyer will buy the share prior to or at the expiry of the contract. And the opposite is the case with option sellers.
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What is CE in the stock market?
CE is the short form of the Call option. More precisely, it is known as Call European. These types of investment contracts provide the option investor the right, but not the obligation, to purchase a stock, bond, product, or any other asset at a pre-determined coast within a certain time period.
When the value of these underlying assets rise, the call buyer gains. In short, buying a call option on security will give the investor a choice to buy a fixed number of shares of that company at a fixed price (known as the strike price) before a particular date (known as the expiry date).
A call option holder is bullish on his position and will benefit from his position when the share price rises above the strike price.
Example of a Call option
You buy a call option on Reliance Industries Limited with a strike price of ₹1990 at a moment when the current price is ₹1970. Since the call option was quoted at ₹20, you’ll have to shell out a premium of ₹20 per share, or ₹5000 (20*250).
Now, if in the cash market, the value of Reliance shares reaches ₹2110/share, you will start reaping profits.
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What is PE in the stock market?
PE is the short form of Put Option. It is specifically known as Put European. A put option is a contract that gives the holder of the option the privilege but not the commitment, to sell the security at a specific price (strike price) within a certain time period.
A put option is the exact opposite of a call option. There can never be a transaction without either a buyer or a seller. In a similar manner, investors can’t buy call options without similar put options being offered.
A put option holder is bearish on the share value and will benefit from his position when the share price goes below the strike price.
Example of a Put option
Consider the same example we took with regards to the call option.
You buy a put option on Reliance Industries Limited with a strike price of ₹1990 at a moment when the current price is ₹2130. Since the call option was quoted at ₹20, you’ll have to pay a premium of ₹20 per share, or ₹5000 (20*250).
Now, if in the cash market, the value of Reliance shares reaches below ₹1970/share, you will start reaping profits.
Best Mediums for CE and PE Calls
There are multiple sources where you can get calls on F&O, But you should be very careful while considering these calls, enter the trade on your own risk, do your own analysis as well before setting up any F&O trading, In F&O most traded options are Nifty and Bank Nifty.
Here are the list of mediums
- TV Channel – ZeeBusiness (Cash ka Option), (Basin ka haseen shares)
- Telegram Groups – There are multiple telegram group , one recommended channel is “ENGINEERS OF STOCKMARKET“
How to do Options Trading in Upstox?
There are multiple stock trading platforms to do CE and PE trading, we will be explaining you how to do options trading in Upstox.
Step 1: Open the Upstox app and navigate to “Search” Icon at left top corner.
Step 2: Navigate to F&O menu
Step 3: Navigate to F&O menu and type desired Indices or stocks to trade, with desired CE and PE select any one.
Step 4: Now select any option “Buy” or “Sell”
Step 5: Now you need select 1 lot or more, minimum quantity to be traded will be mentioned in that field, we recommend, since you are beginner select 1 lot and start trading and click on “Review” button.
Step 6: Once you click on “Review” button in the next screen you need to confirm the order by swiping the “Swipe to schedule order“
You can also do options trading with other trading apps as well, you can choose from the list.
Strategies for Using CE and PE
Options trading is becoming more popular in India, with traders employing a variety of strategies to profit. In this section, we will look at three popular call and put option strategies: hedging, speculating, and income generation, as well as a real-world example from the Indian stock market.
Hedging is a trading strategy that traders use to limit their potential losses. Assume a trader owns 100 shares of Infosys and is concerned about a possible market downturn. In that case, the trader could protect himself by purchasing a put option on Infosys’ stock.
If the stock price falls below the strike price of the put option, the trader can exercise the option and sell the shares at the higher strike price, thereby limiting his or her losses.
Speculating is a high-risk, high-reward strategy that involves buying or selling an asset based on a market forecast or prediction.
Assume a trader believes that the value of Tata Steel’s stock will rise in the coming weeks. In that case, the trader could purchase a call option on Tata Steel’s stock, which would allow them to profit if the stock price rose above the option’s strike price.
3. Income Generation
Income generation is a popular option trading strategy that involves writing call and put options in order to profit from the premiums. Assume a trader writes a call option on Hindustan Unilever stock with a strike price of ₹2500 and a one-month expiration date.
If the stock price remains below ₹2500 until the expiration date, the trader maintains the premium and profits from the trade.
Let’s look at a real-world example of using call and put options to generate income. Assume a trader owns 500 shares of Reliance Industries and is optimistic about the stock’s long-term prospects while being concerned about potential short-term market fluctuations. The trader could then sell a covered call option on Reliance’s stock. The trader would sell a call option with a strike price greater than the stock’s current market price and receive a premium from the option buyer. The trader keeps the premium and retains ownership of the stock if the stock price remains below the strike price until the expiration date.
If the stock price rises above the strike price, the trader would have to sell the shares at the higher price, but still earn a profit from the sale and the premium received from the option buyer.
Some basic yet important pointers to consider while trading in options
- Buy a call option or sell a put option only when you expect the market to go up.
- Buy a put option or sell a call option only when you expect the market to go down.
- The buyer of an option has unlimited profit potential and limited risk (to the extent of the premium paid).
- The seller of an option has an unlimited risk potential and limited reward (to the extent of the premium received).
- Majority of options traders prefer to trade options only to capture the variation in premiums.
- Option premiums tend to gyrate drastically – as an options trader, and you can expect this to happen quite frequently.
Discussed above were some of the important terminologies that one needs to know before diving deep in the world of options. While loads of money can be made by trading in options, it is not as easy as it looks.
In a recent interview, the founder of Zerodha, Mr Nithin Kamath revealed that less than 1% of the active traders present on Zerodha earn FD beating returns. This means the rest 99% did not even earn what is given by FDs.
Keeping this in mind, one should trade cautiously.
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What is the full form of CE in Stock Market?
The full form of CE is Call Option
What is the full form of PE in Stock Market?
The full form of PE is Put Option
Is Option Trading Safe?
Option trading is quite risky, compared to normal trading, it requires lot of market analysis, option trading is done by professional traders, we recommend beginners to stay away from this type of trading.
Is options trading Better Than Stocks?
Option trading has high risk involved in it, In terms of short term returns option trading is better than delivery stock trading.
Which platform is best for options trading?
There are many stock trading platforms for option trading, but we recommend Zerodha for options trading, since its simpler to use and its fast.
I have seen some groups provide Call and Put Option are they accurate?
Beware of those calls, would say do your own research and invest in CE or PE, or take expert financial advisor help.
I am a beginner in trading, can I start CE PE trading?
A big NO!, first you need to understand the concept of trading, we would say do intraday or delivery trading, don’t enter the F&O it might washout your portfolio.