Scribd
Upload
66 views21 pages

Unit 3 - Mechanics and Properties of Options

This document provides an overview of options, including: 1. Options confer the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a particular date. 2. The basic types of options are calls, which provide the right to buy, and puts, which provide the right to sell. 3. Key terms include expiration date, the date the option expires; premium, the price paid for the option; and participants such as holders who buy options and writers who sell options.

Uploaded by

Nikita Daki
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
66 views21 pages

Unit 3 - Mechanics and Properties of Options

This document provides an overview of options, including: 1. Options confer the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a particular date. 2. The basic types of options are calls, which provide the right to buy, and puts, which provide the right to sell. 3. Key terms include expiration date, the date the option expires; premium, the price paid for the option; and participants such as holders who buy options and writers who sell options.

Uploaded by

Nikita Daki
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 21

Unit 3

Mechanics and Properties of options


Presented By-
Dr. Meera Hirapurkar
Options-The Basics
• Like futures and forward instruments, the options are
also important derivative securities trading all over the
world for the last three decades.
• The primary difference between an option and a
futures or forward is that options confer a right, rather
than obligation, to buy or sell the underlying asset.
• As a result, pay off under options will be different to
futures or forward, and hence the price of underlying
security.
• In this section, we will discuss the nature, features,
types and mechanism of options.
The Concept of Options
• An option is a particular type of contract between
two parties where one person gives the other
person the right to buy or sell a specific asset at a
specified price within a specific time period.
• In other words, the option is a specific derivative
instrument under which one party gets the right,
but no obligation, to buy or sell a specific quantity
of an asset at an agreed price, on or before a
particular date.
• A financial contract between an option writer
(seller) and an option buyer (holder) that gives
the option buyer a right but not an obligation
to either buy or sell an asset/goods/service at
a pre-determined price by a pre-specified
date.
Example- one person buys an option contract to purchase100
shares of state bank of India at Rs. 300 per share for a period
of 3 months. It means the said person has the right to
purchase the share of state bank of India at Rs.300 per share
within 3 months from the date of contract. If the price of
state bank of India increases, he will exercise the option, and
if the price falls below Rs.300, then he will not exercise his
option.
 It is evident from the above that an option is the right, but not
the obligation to buy or sell something at a specified date at a
stated price.
• Which means the option buyer will exercise
the option, optionally when he is in profit.
• In case of loss, he will not exercise the option.
• Today options are traded on a variety of
instruments like commodities, financial assets,
bank time deposits, treasury securities, stock,
stock indexes, petroleum products, food
grains and metals etc.
Options Terminology
• Following are the important terms which are
frequently used in option trading-
• Expiration date- the date specified in the
options contract is known as the expiration
date, the exercise date, the strike date or the
maturity.
• Option Premium- the price an option buyer
pays and an option writer receives is known as
the premium. The premium is the price at
which an option trades, and is paid by the
buyer to the seller of the contract.
Basic types of Options
1. Call Option- a call option gives the holder the
right but not the obligation to buy an asset
by a certain date for a certain price.
2. Put Option- A put option gives the holder the
right but not the obligation to sell an asset by
a certain date for a certain price
• The price of options is decided between the
buyers and sellers on the trading screens of the
exchanges in a transparent manner.
• The investor can see the best five orders by price
and quantity.
• The investor can place a market limit order, stop
loss order, etc.
• The whole process is similar to that of trading in
shares.
Call Option
• A call option gives the holder the right to buy
an asset at a certain price within or at the end
of a specific period of time.
• Calls are similar to having a long position on a
stock.
• Buyers of calls hope that stock will increase
substantially before the option expires.
Put Option
• A put option gives the holder the right to sell
an asset at a certain price within or at the end
of a specific period of time.
• Puts are similar to having a short position on a
stock.
• Buyers of put options hope that the stock will
decrease substantially before the option
expires.
Participants in the Options market

People who
buy options
are called People
Holders. who sell
options
are called
Writers
• Buyers are said to have long positions, and sellers are said
to have short positions.
• Important distinction between buyers and sellers: Call
holders and put holders (buyers)are not obliged to buy or
sell. They have the choice to exercise their rights if they
choose.
• Call writers and put writers (sellers), however, are obligated
to buy or sell.
• This means that a seller maybe required to make good on a
promise to buy or sell, whenever the option buyer exercises
his option.
THANK YOU

You might also like