An option is form of a derivative which is a contractor a provision of a contract. The option gives the option holder a right to perform a transaction with the option issuer as per a certain term. The two types of options are calls and puts.
The derivatives market features are attracting the investors and traders to switch from the cash market trading to the futures and options trading. The investors chose to trade in derivatives market because here they have an option to hedge and leverage.
The options trading is a good option for those investors who wish to be the part of the stock market but do not want to trade or hold a large magnitude of stock but are fine to pay a small amount which is the premium to protect their portfolio.
Call options gives the holder the right but not the obligation to buy an underlying asset at a particular price which is called the strike price for a certain period of time. The investors can buy Nifty call option if they feel that the share price of an underlying asset might rise or he may sell a call option if he thinks it will fall.
Also, the buyer of the call option has the right to buy shares at the underlying asset’s strike price till the call option expires. But the buyer of the call does nothave any obligation to purchase the underlying shares.
The buyer of a call option makes the profit as the price of the underlying asset rises. And, the price of the call option will rise as the price of the underlying asset rises. The seller of the call option, also known as the writer,wishes the opposite to happen, as he will gain more if the price of the underlying shares falls.
A put option is an agreement that gives the owner of that put option the right, but not the obligation, to sell a particular sum of an underlying asset at a set price within a specified period of time.Put options provides the holder the right to sell an underlying asset at a particular price known as the strike price. Investors buy put options if they think the share price of the underlying stock will fall, and sell if they think it will rise.
Hence, the purchaser of a put option has the right to sell his underlying asset at a fixed price. Alternatively, the sellers of put options will have to purchase the shares of the underlying stock at the fixed strike price in case the put buyer decide to sell their shares.
The buyer of a put option gains if the price of the underlying stock reduces. And, the value of a put option rises as the price of the underlying stock falls. Hence, the sellers of the put options wish to have the option to expire with the price of the underlying stock standing higher than the option’s strike price.