Basic Option Jargons

BASIC OPTION JARGONS

Decoding the basic jargons

Call Option’ concepts such as –

It makes sense to be a buyer of a call option when you expect the underlying price to increase
If the underlying price remains flat or goes down then the buyer of the call option loses money
The money the buyer of the call option would lose is equivalent to the premium (agreement fees) the buyer pays to the seller/writer of the call option.

In the next chapter i.e. Call Option (Part 2), we will attempt to understand the call option in a bit more detail. However before we proceed further let us decode a few basic option jargons. Discussing these jargons at this stage will not only strengthen our learning, but will also make the forthcoming discussion on the options easier to comprehend.

Here are a few jargons that we will look into –

Strike Price
Underlying Price
Exercising of an option contract
Option Expiry
Option Premium
Option Settlement

Do remember, since we have only looked at the basic structure of a call option, I would encourage you to understand these jargons only with respect to the call option.

Comments

Popular posts from this blog

THE NIFTY FUTURE Basics of the Index Futures Within the Indian derivatives world, the Nifty Futures has a very special place. The ‘Nifty Futures’ is the most widely traded futures instrument, thus making it the most liquid contract in the Indian derivative markets. In fact you may be surprised to know that Nifty Futures is easily one of the top 10 index futures contracts traded in the world. Once you get comfortable with futures trading I would imagine, like many of us you too would be actively trading the Nifty Futures. For this reason, it would make sense to understand Nifty futures thoroughly. As we know the futures instrument is a derivative contract that derives its value from an underlying asset. In the context of Nifty futures, the underlying is the Index itself. Hence the Nifty Futures derives its value from the Nifty Index. This means if the value of Nifty Index goes up, then the value of Nifty futures also goes up. Likewise if the value of Nifty Index declines

Mutual Funds Basics WHAT ARE MUTUAL FUNDS: A mutual fund is an investment vehicle, which pools money from investors with common investment objectives. It then invests their money in multiple assets, in accordance with the stated objective of the scheme. The investments are made by an ‘asset management company’ or AMC. For example, an equity fund would invest in stocks and equity-related instruments, while a debt fund would invest in bonds, debentures, etc. As an investor, you put your money in financial assets like stocks and bonds. You can do so by either buying them directly or using investment vehicles like mutual funds. In this segment, we will understand mutual funds and how to trade in them. History of mutual funds in India Mutual funds in India have come a long way since 1964 when the Unit Trust of India was the only player. By the end of 1988, UTI had total assets worth Rs 6,700 crore. Soon after, eight funds were established by banks, LIC and GIC between

CALL OPTIONS BASICS Breaking the Ice The options market makes up for a significant part of the derivative market, particularly in India. I would not be exaggerating if I were to say that nearly 80% of the derivatives traded are options and the rest is attributable to the futures market. Internationally, the option market has been around for a while now, here is a quick background on the same – Custom options were available as Over the Counter (OTC) since the 1920’s. These options were mainly on commodities Options on equities began trading on the Chicago Board Options Exchange (CBOE) in 1972 Options on currencies and bonds began in late 1970s. These were again OTC trades Exchange-traded options on currencies began on Philadelphia Stock Exchange in 1982 Interest rate options began trading on the CME in 1985 Clearly the international markets have evolved a great deal since the OTC days. However in India from the time of inception, the options market was facilita

WHAT IS STOCK MARKET?

Search This Blog