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Options Basics - You Should Learn

Published on Tuesday, December 02, 2014
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.

American-Style Options

Options that can be exercised at anytime

European 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.

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ramandeep singh

Hey I am Ramandeep Singh. I am determined to help students preparing for RBI, SEBI, NABARD and IBPS exams. Do you want me to help you ?

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