The two types of stock options are puts and calls.
Call Option: A Call Option gives an option buyer (then holder) the right but not the obligation to buy the underlying asset (stock, commodity, currency, etc.) at a pre-specific price (strike price) and at a pre-specified date (expiry date). When a trader has hope to stock move upside he can buy a call option.
Put Option: A Put Option gives an option buyer (then holder) the right but not the obligation to sell the underlying asset (stock, commodity, currency, etc.) at a pre-specific price (strike price) and at a pre-specified date (expiry date). When a trader has hope to stock move downside he can buy a put option.
The strike priceis 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.
In exchange for the rights conferred by the option, the option buyer 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.
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. For instance, stock options listed in the United States expire on the third Friday of the expiration month.
Duration of an Option:
In India, options can be traded for 3 months:
1. Near Month: January (current on-going month)
2. Next Month: February (next month)
3. Far Month: March (next to next month)
Moneyness of an Option:
Comparing the spot price with the strike price at expiry date, Options will be classified under 3 categories:
|Call Option||Moneyness||Put Option|
|Strike Price < Spot Price||In The Money||Strike Price > Spot Price|
|Strike Price = Spot Price||At The Money||Strike Price = Spot Price|
|Strike Price > Spot Price||Out of the Money||Strike Price < Spot Price|