Options Trading

What are Options?

Options are one type of derivative contracts which gives the buyer the right, but not the obligation, to buy or sell an agreed amount of underlying asset (a stock or index), at a specific price on or before a certain date.
Options are traded both on exchanges and in the over-the-counter market. There are two types of option.

Call Option:

Call options provide the holder with the right to acquire an underlying at an exercise or strike price. The holder pays a premium for the right to benefit from the appreciation in the underlying.

Put Option:

Put options provide the holder with the right to sell the underlying at an exercise price or strike price throughout the option term. The holder gains as the market price of the underlying falls below the strike price.

American options can be exercised at any time up to the expiration date. European options can be exercised only on the expiration date itself.

Option Terms
Buyer of an option The buyer of an option is the one who by paying the option premium buys the right but not the obligation to exercise his option on the seller/writer.
Writer of an option The writer of a call/put option is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercises on him.
Option Price/ Premium The premium which the option buyer pays to option seller.
Expiration date A day on which the option is no longer valid and ceases to exist
Strike Price Predetermined price upon which the buyer and seller of an option have agreed.
Long In stock exchange terminology, Long means to buy
Short In stock exchange terminology, Short means to sell

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