Today I am going to discuss basics of Options that you must know. This topic is really important for Bank interview
What is an Option
An Option give right to Option Holder to buy or sell a commodity during a certain period of time or on a specific date.
For example - I own a Garment mill. I need 100 tonnes of cotton in the last quarter of every year. In June this year, price per bale of cotton is Rs 2000. Prices may rise or fall.
I don't want to take this risk, as this is not my business. So I will find a person whose business is to take risks. In exchange of contract money I will buy the right to buy 100 tonnes of cotton at Rs 2000. I may or may not use this option.
I don't want to take this risk, as this is not my business. So I will find a person whose business is to take risks. In exchange of contract money I will buy the right to buy 100 tonnes of cotton at Rs 2000. I may or may not use this option.
American-Style Options
Options that can be exercised at anytimeEuropean style option
Options that can be exercised only at the time of maturity
Call option
An option which gives right to the Option Holder to buy a certain stock at specified time and specified date
Put option
An option which gives right to the Option Holder to sell a certain stock at specified time and specified date
Settlement price
Value of an option is calculated daily. That rice is known as settlement price
Plain Vanilla Call
Basic type of option with a fixed maturity and purchase price
Types of trade
1) Purchase a call
Optionholder gets right (no obligation) to purchase specified securities at a specified time.
2) Purchase a put
Optionholder gets right (no obligation) to sell specified securities at a specified time.
3) Sell a call
Seller of option has obligation to sell specified securities at a specified time.
4) Sell a put
Seller of option has obligation to purchase specified securities at a specified time.
