Options

2. Option Contracts
 Option contracts are the derivatives instruments, it is
similar to the Forward and future contract.
 An option contracts can be defined as a contract
whereby the option holder gets a right to buy or sell the
underlying assets (stock/index/commodity/currency) at
a pre-determined price within a specified time.

3. Types of option Contracts
 Call option; is a contract which gives the holder a right
to buy an underlying assets for a predetermined price
on specific date.
 Put options; it is a contract which gives the holder a
right to sell the underlying assets on a specified date.

4. Features of Option Contract
 Underlying assets of the option contract can be
Stocks/Index/Commodity/currency etc
 It is traded only in organized exchange.
 There are two parties; one party holds the option (i.e.
option buyer or option holder) and other party writes
the option (i.e. option seller or option writer).
 Option holder has the right to buy or sell the
underlying assets, where as option writer has the
obligation to buy or sell the underlying assets.

5.  The parties to the contract are unknown to each other.
 The contact is standardized with respect to the price,
Quantity, maturity etc.
 Since it is has a secondary market, it offers the high
degree of liquidity.
 Options Holders pays the premium and the option
writer receives the same.
 Options contract are settled either by way of physical
delivery of the underlying assets or cash settlement. In
case of cash settlement the trader males/receives the
payments to settle any losses/Gain on or before
maturity period.

6. Options Terminology
 Option Holder
 Option Writer
 Spot rate
 Exercise price/ Strike Price
 Option premium
 Expiration Date (E)
 Intrinsic Value; ( The Amount of Profit being the
Difference between S0 and E)

7. Types of options
 Stock Options
 Index options
 Commodity options
 Currency options

8.  In-The-Money(ITM): The option which is profitable to
its buyer is called In-the-money. Spot Price is Greater
than the Exercise price. (S0> E)
 Out-of-the-Money(OTM): The option which is not
profitable to its buyer is called Out-of-the-money. Spot
rate is lower than the Exercise price (S0<E)
 At-The-Money (ATM); The option which is neither
profitable nor a loss to its buyer is called At-the-
Money. (S0=E)

9. Pay-off Function
Call Option Put Option
So>E ITM OTM
S0=E ATM ATM
So<E OTM ITM