Basic Options Jargon Options are contracts in which a buyer and seller set a price and trade an asset that will be delivered in the future. An option has an expiration date and on that date, the seller has to deliver the asset if the investor exercises the option of physical delivery as a settlement. However, the investor is not obligated to buy the asset at the end of the time period. This is where futures and options differ. Futures is a contract which is similar to options but both parties are obligated to carry out the settlement at the expiration date. This future price is called strike price and it is set according to the current or spot price and the trend of the asset.
The ‘Call’ and ‘Put’
A ‘call’ is the option that conveys to the owner the right to buy at the strike price and a ‘put’ is the option that conveys to the owner to sell at a strike price. The owner of the option may sell the option in a secondary market, privately as an over the counter deal or in an options exchange. It is similar to the equity market where the prediction of the rise and fall of the price of an option decides the trading of that option. A long call is a strategy when a trader expects the price of the option to rise; buys the call option at a strike price that is lower than his prediction. Similarly, a long put is the strategy when the price is expected to drop and he buys a put option.
Options are traded mainly in exchanges and these are done online like most other stock trading. It can be traded in any of the popular exchanges like National Stock Exchange, Bombay Stock Exchange, Multi Commodity Exchange, etc. The privately traded stock is unregulated and a customized deal can be brokered between the two private parties to suit the needs of both these parties. Online options trading requires a trading account with an options brokerage. Options are traded on assets that are commodities and not equities due to the deliverance of said asset at the time of expiration.
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