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Chapter 6: Underlying Assets


In options trading, various underlying assets can be traded, each offering unique opportunities and risks. Here are the primary types of underlying assets used in options trading:

Stock Options

Stock options are contracts that give traders the right to buy or sell shares of a specific company at a predetermined price. These options are typically traded on major stock exchanges. For example:

  • Google (GOOGL): Traded on NASDAQ
  • Tata Consultancy Services (TCS): Traded on BSE and NSE
  • JPMorgan Chase (JPM): Traded on NYSE

Each option contract generally represents 100 shares of the underlying stock, though this can vary depending on the exchange.

Foreign Currency Options

Foreign currency options allow traders to hedge or speculate on currency exchange rate movements. Major exchanges offer various currency options, such as:

  • EUR/USD (Euro/US Dollar)
  • USD/INR (US Dollar/Indian Rupee)
  • GBP/USD (British Pound/US Dollar)

Contract sizes can vary depending on the specific currency pair and the exchange.

Index Options

Index options enable investors to trade on the performance of a particular stock market index. Popular indices with options contracts include:

  • S&P 500 Index (SPX)
  • Dow Jones Industrial Average (DJX)
  • NIFTY 50
  • SENSEX
  • FTSE 100

These options provide a way to gain broad market exposure without having to buy individual stocks.

Future Options

Future options are derivatives based on futures contracts. When trading future options:

  • Call Option: Exercising the call option grants the holder a long position in the underlying futures contract, plus a cash amount equal to the difference between the future price and the strike price.
  • Put Option: Exercising the put option grants the holder a short position in the underlying futures contract, plus a cash amount equal to the difference between the strike price and the future price.

These options typically mature before the delivery period of the futures contract, providing flexibility for traders.

Conclusion

Understanding the various underlying assets available in options trading allows traders to diversify their strategies and manage risks effectively. Each asset type offers unique benefits and challenges, making it essential to choose the right one based on your trading goals and market outlook.

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Chapter 7: Benefits of Option Trading
Chapter 8: Options Valuation
Chapter 9: Options Trade Settlement
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