Introduction to The Basic Options Trading Definitions

    Posted by Ashish Sankhla on 0

    Trading in options segment seems to be very easy but it may not be so, But one thing is true that risk in options trading is limited with huge profit potential.
    Options are one of the most popular derivatives tools in the financial market. It is highly leverage instruments.
    It can be used for the purpose of hedging, speculation and arbitrage.

    If you are keen to invest in options trading you must know some basics of options like what is call options, what is put options, strike price, premium, etc before investing real.


    What are Options



    Options is a contract which gives buyer the right , but not the obligation to buy or sell an underlying asset at a specific price for a specific period.
    In options, buyer of options has rights but no obligations to honour his contract and seller has only obligations and no rights to honour his commitment.
    Options buyer is also called as holder and seller is called as writer.

    An options is in simple terms a contract entered into two parties i.e.
    1. Buyers
    2. Seller
    what is options trading



    Type of Options


    There are two types of options contracts traded in the financial terms.
    • Call Options
    • Put Options
    Call Options give the options buyer the right to buy the underlying stock or security at a predetermined price..
    Put Options give the options buyer the right the sell the underlying stock or security at a predetermined price..

    Buying put or call options enables the investors to make profit in unilateral market without having to buy and sell stock.
    Buying put options enables traders to make profit when the markets fall without having to sell short stock.
    Similarly, Buying call options enables traders to make profit when the markets rise with a limited risk of premium. You can buy or sell Options just like you buy or sell shares.


    Related Options Terminology


    Strike Price : Strike rate is a price for which the underlying security or stock can be purchased or sold on expiry date. Some of them In The Money, some of them Out Of The Money and one In The Money Option.
    For instance if spot price is 6100, then strike prices are 5900, 6000, 6100, 6200, 6300.
    Here two options are in the money, two out of the money and one at the money.

    Spot Price : The current market price of the underlying security or index at a particular time.

    Premium : Premium is the total cost of an options which users have to pay when they purchase an options.
    Premium = Intrinsic Value (I) + Time Value (T)

    Lot Size : Future and Options are traded in lot size, you can buy 1 lot, 2 lot or any number of lots as you wish, Like Nifty options have lot size of 50 while Bank Nifty Options have 25 Lot Size.

    Option Style : Options are of two styles, (1) European (2) American.
    In European options, All options are exercised on the last day of series expiry.
    In American options, Here Buyers can exercise the option any time during before or on expiry date.

    Expiry Date : Last day of future and option contract called expiration date. In Indian markets Nifty and Sensex derivatives expire on last Thursday of every month.

    Series : A futures and option contract belongs to a particular series. One series belongs to a particular month.
    E.g. Nifty Index Futures series for January or March etc. Nifty series is coded as below –
    FUT IDX NIFTY 30-Jan-2014 Here, not only month, but expiry date is also available.

    Open Interest : Open Interest (OI) is the number of outstanding contracts (which have not been closed) that remain for an expiration month. Open Interest only applies to futures and option trading.


    Conclusion

    For aggressive traders who are very bullish or bearish about the prospects for a stock or index, Investing in options can be an excellent way to capture the upside or downside potential with limited downside risk.



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