An Option is an agreement between two parties giving the buyer right, but it is not compulsory to buy or sell shares at a predetermined price on or before predetermined date. There are two categories of option call options and put options. Call options give the buyer right but it’s not compulsory for the buyer to buy the shares at a predetermined price, on or before predetermined date. Put options give the buyer the right but it’s not compulsory for the buyer to sell shares at a predetermined price, on or before predetermined date.


Components of Option Contract

There are five components of option contract they are first underlying securities, second size of option contract, third expiry date of option contract, fourth exercise price and fifth is premium. Option markets are available for selected by securities approved by ACH. These securities are known as underlying securities. Option contract size is fixed 1000 shares. One option contract represents 1000 shares. There’s an expiry date for every option contract. Expiry day is day on which all unexercised option in a particular succession expires and is a last day for trading for that particular succession. Exercise price is a predetermined buying or selling price if the option is practiced. Last, premium is the price of option, which is decided, by buyer and the seller after negotiation.

In option buyer acquire long position and seller acquire short position. The seller of a call option is “short a call” and seller has the obligation to sell to the holder, buyer is “long of a call option” and buyer has the right to buy. The seller of a put option is “on the short side of the position”, and seller has the obligation to buy from the buyer of the put option, who is “long a put”. Buyer and seller of the option do not interact with each other directly there’s a intermediary known as option exchange which interact on behalf of buyer and seller. Option can be in the money, at-the-money or out-of-the-money.

In-the-money options have positive intrinsic value and at-the-money or out-of-the-money options have intrinsic value of zero. The maximum loss for the seller of a put option is equal to the strike price. The risk for the buyer of a call option is unlimited. The option style adopted for option affects the terms of options like American style that allows exercise before maturity date. By options, one party transfers buying and selling risk to or from another.

Related posts:

1. Call Options
2. Put Options
3. The first thing you should know about the options
4. Option 101
5. Investment Options
6. Options: Due Date
7. The exercise price
8. Derivatives markets
9. Options, What are they and how
10. Risks to the seller