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Stock Split We all come across financial issues that sound Greek. Here is The Finapolis translating Stock Split for you...
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Options
We all come across financial issues that sound Greek. Worry not. We’re here to guide you through the maze…
By Team Finapolis      | Nov 2014
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Just like futures, Options is a contract between a seller and a buyer. Here however, buyer of the Option does not have to compulsorily exercise the contract (hence Option). That is, buyer of the option has the right to buy or sell the underlying security under the contract at a particular price at a future date but is not obligated to do so.

As is clear from above there are two parties involved in an option contract — buyer of the option (buys the right to buy or sell the underlying security (Index or a stock) by paying the option premium) and seller of the Option (sells the option to the buyer the right to buy or sell the underlying security and accepts Option Premium).

Types of Options

There are two types of options one can buy based on the Underlying Instrument: Stock Options and Index Options where as the name suggests the underlying security in the first is a specific stock while in the latter it is the Index. Within the options based on the Right to Buy or Right to sell the options are referred to as the Call Option and Put Option respectively.

Simple definition of both from the point of view of Buyer of Option and Seller of option are:

A call gives the buyer the right, but not the obligation, to buy the underlying security.

A put gives the buyer the right, but not the obligation, to sell the underlying security.

Selling a call means that one has sold the right, but not the obligation, for someone to buy something from you.

Selling a put means that one has sold the right, but not the obligation, for someone to sell something to you.

Option Premium

Option Premium is the price which has to be paid to buy the option. This is the price which has to be paid in order to purchase either a call option or put option. Price of the option is decided on various factors and is for one individual security. The options are purchased for the minimum lot and its multiples thus the option price is generally the option price for one security multiplied with the lot size.The permitted lot size for futures contracts & options contracts is the same for a given underlying security or such lot size as may be stipulated by the Exchange from time to time.

Strike Price

The Strike price is the price at which the underlying security can be bought or sold as decided in the contract. Each option quote carries code for the Underlying security, Strike Price and Option Expiry. It is the strike price which tells about whether the option is in-the-money, at-the-money, or out-of-the-money when compared to the price of the underlying security.

In the money

For Call option - underlying security price is more than the strike price.

For Put option - underlying security price is less than the strike price.

Out of the money

For Call option - underlying security price is less than the strike price.

For Put option - underlying security price is more than the strike price

At the money

The underlying price is equivalent to the strike price.

Option Expiration Date

The Expiration Date is the day on which the option expires or the date after which the option is not valid. The options like futures expire on the last Thursday of every month. So, each month the options will expire on such day and new contract is issued on the next day in order to ensure there are similar numbers of options available every month.

TAGS:
Option | Seller | Buyer | |
Comments
Very basic information.... How to use options for trading can give more help.....
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