What Are Options?
This is in continuation of my last article on derivatives.
An option is nothing but a “Right Given to the Holder of the Option“. It may be a “Right to Sell” Or “Right to Buy“. The right to sell option is called a put option and right to buy option is called as call option.
When a person buys an option note only the right is transferred. It is not necessary that a person should execute the right on maturity date. Then the question arises how a seller can make profit out of it even if it is not executed on the maturity date. The buyer of the option has to necessarily pay a premium called option premium for buying that option. The buyer can buy a put option or a call option. The simple logic is a buyer who expects a price rise will buy a put option for a price determined today and a buyer who expects price fall will buy a call option. Call and put options are there in stocks, commodities etc.The next one is Swap which deals with currency rate exchanges which may not be that significant.
Keep going. Helpful tips.
Options are contracts.. They are binding contracts between two parties, one who buys and one who sells. If you sell a put, its a contract that you will have to buy the stock if a put buyers ” puts” you the stock at the option strike price if the stock is trading at that strike. So be aware that these contracts are enforced if needed be.