INTRODUCTION TO OPTIONS

An option is a contract that gives the right, but not an application, to buy or sell the underlying asset on or before a stated date /day. the party taking a long position, buying the option is called the buyer/holder of the option and the party taking a short position, selling the option is called the seller/writer of the option.

Options are categorized into two types – CALL OPTIONS AND PUT OPTIONS. Option, that gives the buyer a right to buy the underlying asset, is called a call option and the option that gives the buyer a right to sell the underlying asset, is called a put option.

IMPORTANT TERMS IN OPTIONS

INDEX OPTION – these options have index as the underlying asset . for example options on Nifty, Sensex , etc..
STOCK OPTION– These options have individual stocks as the underlying asset . for example . option on tata power , TCS etc…
BUYER OF AN OPTION – The buyer of an option is one who has a right but not the obligation in the contract . for owning this right , he pays a price to the seller of this right called “ option premium” to the option seller.
WRITER OF AN OPTION – The writer of an option is one who receives the option premium and is thereby obliged to sell /buy the asset if the buyer of option exercises his right.
AMERICAN OPTION – The owner of such option can exercise his right at any time on or before the expiry date /day of the contract.
EUROPEAN OPTION – The owner of such option can exercise his right only on the expiry date / day of the contract . in INDIA, index options are EUROPEAN .
OPTION PRICE– It is the price which the option buyer pays to the option seller.
LOT SIZE – Lot size is the number of units of underlying asset in a contract . lot size nifty is 25 and bank nifty 15.
EXPIRATION DAY – The day on which a derivative contract ceases to exist.