Meaning of Options
The word option simply refers to choice or freedom. This choice or freedom may or may not be used depending upon the situation Option means right without obligation An option is a contract that gives the holder (owner) the right, but not the obligation, to buy or sell an underlying asset at a specified price on or within a specified date in future.
Thus, Option is a special type of contract which gives its holder the right, but not the obligation, to buy or sell an asset at a fixed price at some future date) For example, one person buys an option contract to purchase 100 shares of SBI at 250 per share within a period of 3 months. It means that the said person has the right to purchase the shares of SBT at 250 per share within 3 months from the date of the contract. If the share price increases, he will exercise the option. This is because he can buy shares at 250 even though the price, is increased. If the share price falls below 250, then he will not exercise the option (he has no obligation to buy). This is because he has to pay 250 for one share even though the market price is fallen. Thus, it is clear that an option is the right but not the obligation to buy or sell something at specified date at a stated price. It means that the option buyer will exercise the option when he is in profit. In case of loss, he will not exercise the option.
Important Terms in Options
- Exercise price (Strike price): The price specified in the option contract is called exercise or strike price. It is the fixed price at which the owner can buy (or sell) the asset.
- Spot price:The current market price of the asset at the time of exercising the option is called spot price.
- Underlying:Every option is based on the price of some assets that is not traded in the option marked this asset is called underlying asset or simply underlying.
- Premium:The purchaser or owner of the option has the right to exercise the option or not if it is beneficial, he will exercise the option. If it is not beneficial, he will not exercise the option. He has no obligation to exercise the option. The seller has no such right. He must meetnhis obligation. Thus, the buyer of an option gets greater benefit. Hence, the seller would enter into option contract, only if the buyer compensates the seller for the potential loss that the seller would incur. The seller is taking the risk of price change. Hence, the seller demands that the buyer should pay an amount at the time the option contract is entered into. This amount that the option buyer needs to pay to the option writer (seller) is known as option premium. Thus, premium is the amount which the seller charges the buyer in the form of a return for guaranteeing the exercise of option. If the buyer does not exercise the option, he will lose the premium paid the premium is to be paid initially, le, at the time of signing the contract The option premium is the option price.
- Exercise date:The date on which the option is actually exercised by the buyer is known as exercise date.
- Expiration date: The date on which the option expires is known as expiration date In other words, it is the last day by which the option has to be exercised in short, it is the final settlement day. It is also known as expiration date or maturity. On expiration date, either the option is exercised or it expires worthless.
For example, on 23rd November 2019, Roopa enters into call option contract with Reeja for buying 1,000 shares of Infosis after one month at 800 per share by paying a premium of 15 per share to Reeja,
In the above example, Roopa is the option buyer (owner or investor), Reeja is the option seller (writer), 1,000 shares of Infosis become the underlying asset, 800 is the strike price, the period of contract one month is the expiration period, and the last Thursday of December 2019 is the expiration date.
For More Reading Visit
Options 👇
https://freebird.data.blog/2022/06/25/options/
Site Title 