Options are financial derivatives that give the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price (strike price) within a specified period (until expiration). In the context of the Indian stock market, options trading involves contracts based on individual stocks or market indices. There are two main types of options: call options and put options.
- Call Options:
- Buyer’s Perspective: A call option gives the buyer the right (but not the obligation) to purchase the underlying asset at the specified strike price before or at the expiration date.
- Seller’s Perspective: The seller (writer) of the call option has the obligation to sell the underlying asset if the buyer decides to exercise the option.
- Example: If an investor buys a call option on a stock with a strike price of โน1,500, they have the right to buy the stock for โน1,500 per share before or at the expiration date.
- Put Options:
- Buyer’s Perspective: A put option gives the buyer the right (but not the obligation) to sell the underlying asset at the specified strike price before or at the expiration date.
- Seller’s Perspective: The seller (writer) of the put option has the obligation to buy the underlying asset if the buyer decides to exercise the option.
- Example: If an investor buys a put option on a stock with a strike price of โน1,200, they have the right to sell the stock for โน1,200 per share before or at the expiration date.
Key concepts related to options trading in the Indian stock market:
- Option Premium: The price paid by the buyer to the seller for the rights conveyed by the option contract. It represents the cost of obtaining the option.
- Expiration Date: The date when the option contract expires. After this date, the option is no longer valid.
- Strike Price: The predetermined price at which the underlying asset can be bought (for call options) or sold (for put options) if the option is exercised.
- Lot Size: Options in the Indian stock market are typically traded in lots. The lot size represents the number of units of the underlying asset covered by one option contract.
- In-the-Money, At-the-Money, Out-of-the-Money: These terms describe the relationship between the option’s strike price and the current market price of the underlying asset. An option is:
- In-the-Money (ITM) if it has intrinsic value.
- At-the-Money (ATM) if the strike price is equal to the market price.
- Out-of-the-Money (OTM) if it has no intrinsic value.
Options can be used for various purposes, including speculation, hedging, and generating income. Traders and investors should be aware of the risks associated with options trading, such as the potential loss of the premium paid, and consider their risk tolerance and investment objectives before engaging in options transactions.