Options are a type of derivative contract that gives the holder the right, but not the obligation, to buy or sell the underlying asset at a predetermined price at a specific date. Options contracts are traded on exchanges and used by investors to hedge against risk or speculate on the underlying asset’s future price. Check how to open demat account.
Types of options
There are two main types of options: calls and puts.
Call options give the holder the right to purchase the underlying security at a predetermined price by a specific date. Put options give the holder the right to sell the underlying security at a predetermined price at a specific date. The price at which the underlying asset can be bought or sold is called the exercise price. The expiration date of an option is called the expiration date. Check how to open demat account.
How options work
When purchasing an options contract, the buyer pays a premium to the seller of the contract. The bonus is the price a buyer is willing to pay for the right to buy or sell the underlying asset at the strike price by the expiration date. Check how to open demat account. If the buyer of an options contract decides to exercise the option, they will buy or sell the underlying asset at the exercise price, regardless of the asset’s current market price. If the buyer chooses not to exercise the option, the contract expires and the buyer loses the premium paid for the contract.
Option strategies
Various investment strategies can be implemented with options. The most popular options strategies include:
Long Call: The long call strategy is used by investors who believe the underlying asset’s price will rise. An investor purchases a call option on the underlying asset to implement a long call strategy. If the price of the underlying asset increases, the investor can exercise the call option and purchase the asset at a strike price that is lower than the asset’s current market price. Check how to open demat account.
Short Call: The short call strategy is used by investors who believe that the underlying asset’s price will decrease. An investor sells a call option on the underlying asset to implement a short call strategy. If the underlying asset’s price falls, the investor is forced to purchase the asset at a strike price higher than the asset’s current market price. Check how to open demat account.
Long Put: The long put strategy is used by investors who believe the underlying asset’s price will decrease. An investor purchases a put option on the underlying asset to implement a long put strategy. If the underlying asset’s price falls, the investor can exercise a put option and sell the asset at a strike price above the asset’s current market price. Check how to open a demat account.
Short Positions: A short selling strategy is used by investors who believe the underlying asset’s price will rise. An investor sells a put option on the underlying asset to implement a short-selling strategy. If the price of the underlying asset increases. Check how to open demat account.
