Sensex Devta

Options

Option market :

Option are traded either on an organized exchange or on over the counter (OTC) market .

Option Terminology:

Index options : have the index as the underlying. They can be European or American . they also cash settled.

Stock options : they are options on individual stock and give the holder the right to buy or sell shares at the specified price. They can be European or American.

Buyer of an options : The buyer of an option is the one who by paying the option premium buys the but not the obligation to exercise his option on the seller/ writer.

Writer of an option : the writer of a call/ put option is the one who receives the premium and is thereby obliged to sell / buy the assets if the buyer exercise on him

There are two basic types of option , call option and put option.

Call option :A call option gives the buyer of an option the right to purchases from the seller the underlying asset

Put option :A put option gives the buyer of option the right to sell the underlying asset

Option price / premium : it is the price which the option buyer pays to the option seller . it is also called the option premium .

Expiration date : the date specified in the option contract is known as the expiration date , the exercise date , the strike date or the maturity.

Exercise price or strike price : Entering into the contract , the parties agree upon a price at which the underlying asset may be bought or sold . the price is referred to as the exercise price or the strike price .

American style: An option contract which can be exercised any time before the expiration date

European style: An potion contract which can be exercise on the date of expiration date

At –the- money: An option is At- the- money exercise price is equal to the spot price.

In- the- money : A call option is In–the-money when the strike price is below the current spot price of the underlying asset and a put option is In- the- money when the strike price is above the current price of the underlying asset .

Out– of– the-money : A call option is out –of- the-money when the strike price is above the current spot price of the underlying asset and a put option is Out –of –the money when the strike price is below the spot price of underlying asset .

Intrinsic value : call (0,S-X) , Put (0,X-S)

S : spot price , X: Strike price

Time value : The difference between the option premium and the intrinsic value .