> Options are a special type of financial contracts under which the buyers of the options have the right to buy or sell the shares/stocks hut do not haw obligation to do so.

> Essentially, options are of two types: call and put. A call option gives the holder the right, but not the obligation to buy specified stocks at a specified price! (known as the exercise price) on or before a specified maturity date. A put option provides the holder the right, but not the obligation to sell securities on or by a certain date at a predetermined exercise price .

> The buyer of an option (of call as well as put> is in a privileged position as he will exercise it when he finds it profitable. In other words, the seller/writer of the option is under obligation to buy or sell the securities in case the buyer decides to exercise his option. The writer of the option runs the risk of loss. For assuming such 3 risk, he is paid option premium by the option buyer; the higher is the risk, the higher is the option premium.

> Options can either be an European or an American. While an European option can be exercised only on the expiration date, an American option is more flexible in nature and can be exercised at any time up to the expiration date .

Share This