Fundamentals of Options

An option is a contract that gives the holder the right, but not the duty, to make a specified transaction for a specified time.

Alternatively, the contract may grant the other party the right, but not the obligation, to sell a specific asset at a specific price within a specific time period.

Options may be of two types, i.e., call options and put options. Before commodity options were banned in India in 1952, the same two types of options were traded as ‘teji’ (call) and ‘mandi’ (put).

The option is a financial derivative that represents a contract sold by one party (option writer) to another party (option holder).

The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).

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