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options An option contract is the right to buy or sell a pre-determined number of
securities at an agreed price. Thus the buyer of an option contract has
a right to buy or sell but not the obligation to do so from the seller or
writer of the option at a price which is fixed at the time of trade.What is option premium? Option premium is the fee or the price of option. It is payable by the buyer of the option to the seller or writer as the writer is under obligation to honor the terms of option if the buyer insists on the same. Thus buyer of the option has a right to exercise the option while writer of an option has an obligation to fulfill it.
What are different types of options? Options are of two types. ‘Call option” gives buyer of the option, a right but not the obligation to buy a pre determined number of shares at the agreed price and “Put option” will give buyer of the put option a right but not the obligation to sell a pre determined number of shares at the agreed price. An option can be a European option or American option. In case of a European option, the holder of the option can exercise his right to buy or sell only on the expiration day of the contract while in case of an American option, the buyer of option can exercise his right any time before the expiration day. What is an Index Option Contract? An Index option contract is where the underlying security is not an individual share but the Index such as Sensex, Nifty, IT Index and so on. Thus the buyer of a call option on Nifty has a right to buy the Index at a predetermined price on or before a future date. All future index contracts are cash settled.
What is In the Money Option Contract? An In the Money Option contract is when in which the strike price of the option is less than the current market price of the underlying security (for a call option) or above the current market price of the underlying security (for a put option). Such an option has intrinsic value. What is Out of the Money Option Contract? An Out of the money call option is a call option whose strike price is higher than the market price of the underlying security, or a put option whose strike price is lower than the market price of the underlying security. These contracts would become worthless and would not be exercised by the option holder. What is at the money Option Contract? An at the money contract is when the strike price of an option is equal to or nearly equal to the market price of the underlying security. |
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