Basics of Options

What are the options

OPTIONS DEFINITION :
Options are the derivatives instruments which gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date.

TYPES OF OPTIONS : 

1. CALL OPTION –
Option, which gives buyer a right to buy the underlying asset for a set price, at certain future date is called Call Option.
Call option generates money when value of the underlying asset is rising upwards .

2. PUT OPTION –
Option, which gives buyer a right to sell the underlying asset for a set price, at certain future date is called Put Option.
Put option will extract money when value of underlying is falling.

Future vs Options

Call Option Buy vs Future Buy

Future Sell  vs Put Option Buy

Buyer vs Seller in Options

Money-ness in Options 

  • At The Money(ATM): When strike and underlying are at the same price
  • In The Money(ITM):
    • Call option: underlying price is higher than the strike price.
    • Put Option: underlying price is lower than the strike price.
  • Out of The Money(OTM):
    • Call Option: Underlying price is lower than the strike price
    • Put Option: Underlying price is higher than strike price
  • Close to The Money(CTM)

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