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    Option Trading

    Uploaded by

    Rahul Jaiswar
    Option trading allows investors to enjoy potential gains from capital markets while minimizing risk by reserving the right to buy or sell an underlying asset at a future date. There are two main types of options: call options, which give the holder the right to buy an asset at a set strike price, and put options, which give the holder the right to sell an asset at a set strike price. Options can be either American or European style, with American allowing exercise at any time before expiration and European only at expiration. Key terms include premium, strike price, expiration date, and classifications of options as in, at, or out of the money depending on the relationship between the asset price and strike price. Examples demonstrate how call and put options

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    Option Trading

    Uploaded by

    Rahul Jaiswar
    122 views3 pages
    Option trading allows investors to enjoy potential gains from capital markets while minimizing risk by reserving the right to buy or sell an underlying asset at a future date. There are two main types of options: call options, which give the holder the right to buy an asset at a set strike price, and put options, which give the holder the right to sell an asset at a set strike price. Options can be either American or European style, with American allowing exercise at any time before expiration and European only at expiration. Key terms include premium, strike price, expiration date, and classifications of options as in, at, or out of the money depending on the relationship between the asset price and strike price. Examples demonstrate how call and put options

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    Option trading allows investors to enjoy potential gains from capital markets while minimizing risk by reserving the right to buy or sell an underlying asset at a future date. There are two main types of options: call options, which give the holder the right to buy an asset at a set strike price, and put options, which give the holder the right to sell an asset at a set strike price. Options can be either American or European style, with American allowing exercise at any time before expiration and European only at expiration. Key terms include premium, strike price, expiration date, and classifications of options as in, at, or out of the money depending on the relationship between the asset price and strike price. Examples demonstrate how call and put options

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    122 views3 pages

    Option Trading

    Uploaded by

    Rahul Jaiswar
    Option trading allows investors to enjoy potential gains from capital markets while minimizing risk by reserving the right to buy or sell an underlying asset at a future date. There are two main types of options: call options, which give the holder the right to buy an asset at a set strike price, and put options, which give the holder the right to sell an asset at a set strike price. Options can be either American or European style, with American allowing exercise at any time before expiration and European only at expiration. Key terms include premium, strike price, expiration date, and classifications of options as in, at, or out of the money depending on the relationship between the asset price and strike price. Examples demonstrate how call and put options

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    Option Trading Decoded!

    How would you feel, if given an opportunity to enjoy the gains of capital
    markets, minimize the risk and also not pay the entire amount for an
    underlying asset. This is exactly what options trading is packed with. The
    options trading comes from the family of derivatives. However, it is quite
    often that many investors especially with limited knowledge of capital
    market, may find it difficult to understand the concept of options
    trading. Thereby, let’s understand the options trading if you are looking
    for an exciting investment.

    Types of Options Trading:


    There are two types of options trading available for buyers and sellers.
    These are:
    Call Options – In this option, a buyer has the right to buy a specified
    quantity of an underlying asset at a strike price on or before expiration
    date. Here, the buyer has the right but not the obligation to buy the unit.
    However, the seller has the obligation to sell units of the underlying
    asset, if the buyer decides to exercise his or her call option to buy.
    Put Option – Unlike call option, here the buyer has the right to sell
    specified unit of an underlying asset at a strike price on or before the
    expiration date. Likewise, the seller has the obligation to buy the
    underlying asset at the specified strike rate, if the buyer opts for
    exercising his or her option to sell.
    Method of Options Trading:
    At present, the most common method for calculating the option trading
    gains or losses would be American Style or European Style options.
    An American Style options trading can be exercised by the buyer at any
    time before the expiry of the date. That means, you can exercise your
    decision for Call or Put anytime between the day of purchase or sell of
    the option till the day of its expiry.
    On the contrary, a buyer under the European Style option can only
    exercise his or her option on the expiration date and not any time before
    it.
    Terminologies of Options Trading:
    Options Premium – This option consists a small token amount paid by
    the buyer to the seller for reserving the right to buy or sell the option on
    specified expiry date.

    Exercise Price or Strike Price – It is a specified or pre-determined price


    of an underlying asset which can be either bought or sold, if the buyer
    decides to exercise the option.
    Option Holder – A holder is referred as the buyer who reserves the right
    to buy or sell his or her option on or before the expiration date.
    Option seller/Writer – This is the one who is obligated to sell the option
    (in case of Call) or buy (in case of the Put) an underlying asset depending
    upon the buyer’s decision for exercising the option.
    Exercise Date – It is the date at which the option is actually exercised.
    Expiration Date – A specified date on which the option will expire.
    Notably, on the expiration date, either the option is exercised or expires
    worthless.
    Option Series – is an option consisting of a given class with the same
    expiration date and strike or exercise price.
    Option Interest – is the total number of options contracts which are
    outstanding in the capital market at any given point of time.
    Exercise Situations:
    The decision to exercise the option depends upon the three situation of
    an underlying asset. These are – ‘In the Money’, ‘At the Money’ and ‘Out
    of the Money’ option.
    In-The Money – In case of call option, ‘in-the money’ means that the
    strike price of the option is less than underlying asset price. While in
    regards to put option, the strike price is higher than the spot price of the
    underlying asset.
    At the Money option – Here the price of an underlying asset remains
    equal to the strike price on the date of expiry. This is applicable for both
    Call and Put option.
    Out of The Money – If it is a call option, this term means that the strike
    price is greater than the spot price of an underlying asset. On the other
    hand, for put option, the term means that strike price is less than spot
    price.
    Examples:
    Call Option:
    Gita decides to buy 1 European call option on ‘Stock A’ at a strike price of
    Rs 2,600 for which premium of Rs 150 has been paid by her to reserve
    the right to exercise the option on the expiration date. On the expiry
    date, let’s say the ‘Stock A’ value is more than Rs 2600. In this case, Gita
    may decide to exercise her option where she also earns a profit as the
    price crosses to Rs 2,750 (Strike Price + Premium i.e. Rs 2,600 + Rs
    150). Suppose if the price of Stock A is currently Rs 3,000, then Gita
    makes a price of Rs 250 (Spot Price – Strike Price – Premium).
    In case, the price of Stock A falls below Rs 2,600, then Gita is not
    obligated to buy to this option and can choose not to exercise the right.
    However, Gita logs a loss of Rs 150 the premium amount, while the seller
    earns a profit of Rs 150.
    Put Option:
    Ramesh buys one European Put option on Stock B for a strike price of Rs
    1,500 for which he has paid a premium of Rs 100. If, the price of Stock B
    goes below Rs 1,500, then Ramesh can exercise the option as it is ‘in the
    money’ situation. Here, Ramesh’s Break-even point is Rs 1,400 (Strike
    price – premium i.e. Rs 1,500 – Rs 100), and hence he will make a profit
    if the price falls below Rs 1,400. In case, if the price of Stock B is Rs
    1,320, and Ramesh decides to sell the underlying asset at the strike price
    of Rs 1,500 then he makes a profit of Rs 80 {(Strike price – Spot price) –
    Premium Paid)}.
    However, if the price of Stock B on the expiry date stands at Rs 1,550,
    then Ramesh will decide not to exercise the option to sell the underlying
    asset. Here, Ramesh loses the premium paid of Rs 100, which shall enter
    in the account of the seller.
    Overall, a buyer can decide call or put option either for short or long
    term after navigating the situation of markets. If used wisely, the options
    trading can be a powerful money making tool.

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