Option is one the most traded derivative instruments in stock trade. It’s a package between buyers and sellers for the underlying assets such as stocks, index futures bonds or future contracts.
Option contracts allow the buyer to purchase or sell predetermined amounts of underlying assets at a fixed price. If the buyer wishes to exercise his buying and selling rights, he may do so within the set date. Otherwise, he may let the option expire without notice. The seller of the pack is legally obligated to execute the trade if the buyer honors the option contract by the set date.
There are two types of options, the Call option or the Put option. A person who buys a call option has the right to purchase the underlying asset at the strike price within the expiry period. If he buys a call option, he also has the right to purchase the underlying asset at the strike price within the expiry period.
Any option contract must include certain details. This contract will state the type of the option contract. It will also indicate whether the buyer has the selling or buying rights. Based on this, it will be decided whether it is a call option or a put option. Contracts also include information about the nature of the asset as well as the number of units within the lot. The contract also includes the strike prices at the contracts will be traded and the expiry date.
There are two types of options: Exchange traded option or Over the counter. The first is a derivative that can be traded on the exchanges. The latter is trade between the parties without the involvement from the exchange. These trades are therefore not listed on stock exchanges.
An exchange traded option is a standard contractual that is settled between two parties via a clearinghouse. There are price models and accurate prices for these contracts. This option is available for various underlying assets such as stock, bond commodities, and future contracts.
The clearing authority does not restrict the Over-the-counter options. Therefore, the specifications of these contracts are determined based on the terms and requirements of the businesses involved in the trading.
Option trading allows you to have greater leverage. You can still invest with a lower deposit in an asset of greater value. Option trading is less risky and allows one to let his deal expire without taking any action if he fails to make a profit.