2 Stock Option Basics


Definition:
A stock option is a contract between two parties in which the stock option buyer (holder) purchases the right (but not the obligation) to buy/sell 100 shares of an underlying stock at a predetermined price from/to the option seller (writer) within a fixed period of time.

Option Contract Specifications

The following terms are specified in an option contract.

Option Class

The two classes of stock options are puts and calls. Call options confers the buyer the right to buy the underlying stock while Put options give him the rights to sell them.

Strike Price

The strike price is the price at which the underlying asset is to be bought or sold when the option is exercised. It's relation to the market value of the underlying asset affects the moneyness of the option and is a major determinant of the option's premium.

Premium

In exchange for the rights conferred by the option, the option buyers have to pay the option seller a premium for carrying on the risk that comes with the obligation. The option premium depends on the strike price, volatility of the underlying, as well as the time remaining to expiration.

Expiration Date

Option contracts are wasting assets and all options expire after a period of time. Once the stock option expires, the right to exercise no longer exists and the stock option becomes worthless. The expiration month is specified for each option contract. The specific date on which expiration occurs depends on the type of option.

Underlying Asset

The underlying asset is the security which the option seller has the obligation to deliver to or purchase from the option holder in the event the option is exercised. In the case of stock options, the underlying asset refers to the shares of a specific company. Options are also available for other types of securities such as currencies, indices and commodities.

Contract Multiplier

The contract multiplier states the quantity of the underlying asset that needs to be delivered in the event the option is exercised.

The Options Market

Participants in the options market buy and sell call and put options. Those who buy options are called holders. Sellers of options are called writers. Option holders are said to have long positions, and writers are said to have short positions.

2 comments:

Thanks for giving your valuable inputs, TRENDGURUS

OUR EXPERTISE

We provide expert in our field. Over 5+ years of experience we will ensure that you are always getting good guidance from the top people in the industry.

Thought of the day

"The man who has minted money with both hands in the Indian stock market says wealth is important but is not the source of all happiness.", Rakesh Jhunjhuwala

SUBSCRIBE US

Latest News

1) PM Modi fires back at the opposition, forcefully defend demonetisation 2) Nirav Modi to Stay in Jail for at least 28 more days.

By Using this website\Blog, you agree to the Disclaimer provided at Disclaimer -|- Designed by Tritan Solutions Pvt. Ltd -|- Copyright © 2019 -|- All rights reserved

ERP MLM Ecommerce Algo Software Development Company in Delhi | Digital Marketing | Algorithmic Trading | Ecommerce website