Beginners may find the share market confusing and complex. The terms CE and PE in stock market trading are options trading terms, CE refers to a call option and PE to a put option.
Trading options is a complex segment of the investing world, even for those with finance backgrounds. To make money with it, one needs to be aware of the technical terms like 'CE', 'PE', 'Lot size', 'Strike price', and the rest.
This is a segment where investors believe that they can make money fast. But it's also the same area where a single loss can wipe out all the invested capital.
Before diving into the world of options trading, it is important to understand terms like CE and PE completely. We'll cover that in this article.
What is CE in the stock market?
CE stands for Call Options. However, the term CE is short for Call European. A call option is a bet that the price of an asset will increase.
In a call option contract, investors can profit if the price of underlying stock, bonds, commodities, or other assets or instruments rises before the contract expires.
Shares, bonds, and commodities are the most basic types of assets. Buyers of call options make profits when the value of the basic asset increases.
Traders can buy call options in which a set number of shares are purchased at a certain price with a strike price before a specific date i.e. the expiration date of the contract.
Example of CE in Stock Market
If you are optimistic about stock Tata Motors, currently trading at Rs. 400, and are interested in selling the shares at a higher price let say above Rs. 430 in the future. In this case, buying one call option gives you the right, but no obligation, to buy the number of shares specified in that particular contract.
As a result, if the stock closes above your buying strike price at expiration of the contract, then your CE or Call Options will give you profits.
What is PE in Stock Market?
PE stands for put option. Also known as Put European. The put option is a contract that gives the holder the privilege, but not the commitment, to sell the security at a specific price (the strike price) within a fixed period of time.
Put options are the exact opposite of call options. Without a buyer or a seller, a transaction cannot take place. Similarly, an investor cannot buy call options without similar put options being available.
A put option holder is bearish on the share value and benefits from the position when the share price falls below the strike price.
Example of PE in Stock Market
Suppose you buy a put option on Reliance Industries Limited with a strike price of ₹2000 when the current price is ₹2100. If you were to buy a call option at ₹40, you would have to pay a premium of ₹20 per share, or ₹10,000 (40*250).
If, however, the price of Reliance shares falls below ₹2000/share, you will start making profits.
What are CE and PE's other purposes?
CE and PE are also used to hedge your positions. Let's say you have a Demat account and some shares of a particular stock in it. A sudden bad financial news event that affects the stock market.
You could buy some Put Options or sell some Call Options if you want to survive this bearish market. Both buying a Put option and selling a Call option can act as insurance on your shares with some safety in the short term.
When you hedge your positions, you will be protected from possible losses that can occur as a result of huge price fluctuations on the market.
How to do options trading?
We will explain how to do options trading in Upstox. There are multiple stock trading platforms for options trading.
Step 1: First create a FREE account on Upstox. (Rs. 1000 FREE Brokerage)
Step 2: Get your account approved and then login to the platform.
Step 3: Navigate to the "Search" icon in the upper left corner of the app and then navigate to F&O tab.
Step 4: You can now type the desired indices or stocks to trade and select the desired CE and PE.
Step 5: You may now click on the "Buy" or "Sell" button. Now we recommend, since you are a beginner, select 1 lot and start trading and click on "Review" button.
Step 6: In the next screen, you must confirm the order by swiping the "Swipe to schedule order".
In the discussion above, we covered some of the basic terminologies that one should be familiar with before diving into the world of options. Options trading can make you a lot of money, but it's not as simple as it seems.
Frequently Asked Questions on CE & PE
The full form of CE is Call Option.
The full form of PE is Put Option.
Option trading is riskier than normal trading, since it requires a lot of market analysis; option trading is done by professionals, so we recommend beginners avoid it.
While option trading involves high risk, it provides better returns than equity trading in the short term.