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What is an option or option contract?
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1.Contract to keep an offer open for a fixed period during which the offeror cannot withdraw the offer.
2.Formal contract between a seller (the optioner) and a buyer (the optionee) the right (but not the obligation) to buy-and-sell (or to buy-or-sell) a specific property or a fixed-quantity of a commodity, currency, or security, at a fixed price (called exercise price) on or up to a fixed date (called expiration date).
Optionee pays down only a fraction (called premium or option money) of the full value of the contract, thus obtaining an investment leverage.
An option to buy (called call option) is purchased when prices are expected to rise, an option to sell (called put option) when prices are expected to fall, and an option to buy-or-sell (called double option) when prices may go either way.
The most popular types of options are named American option (exercisable any day up to the expiration date) and European option (exercisable only on the expiration date).
Any option that is not exercised is automatically cancelled and the optionee loses the premium. In practice, only a few options are exercised and most are bought from or sold to other optioners or optionees before the expiration date.
Since options are legally binding contracts, they have intrinsic value and are freely traded on the futures exchanges. Futures contracts, in contrast, cannot lapse and their holder have to sell them before their expiration date or take delivery of the underlying item.
Who is an Option Buyer?
Purchaser of a call option or put option is an option buyer.
What is the Option Date?
Date by which a payment must be made to secure a reservation.
Who is an Option Holder?
Option buyer who has not yet exercised or sold the option.
What is the Margin requirement?
Percentage of a security’s value that may be used as a collateral for a loan to finance its purchase. In the US the margin requirement is 50 percent of the value of the bonds or shares, for options it varies between the premium plus 10 to 20 percent of the underlying asset’s value and is called option margin.In India the margin requirement varies from stock to stock.
What is the Option Premium?
Amount the option buyer pays and the option seller receives for granting the specified rights for the specified period under the option. Option price is market price of an option contract depending on factors such as its intrinsic value, time remaining before its expiration, and fluctuations in the value of the underlying asset.
Who is an Option Seller?
Seller of a call option or put option. The Seller is obligated to perform when the option purchaser exercise the rights under the option contract. Also called option writer.
What is a Put Option?
Formal contract between an option seller (optioner) and an option buyer (optionee) which gives the buyer the right but not the obligation to sell a specific contract, financial instrument, property, or security, at a specified price (called exercise Price) on or before the option’s expiration date. Investors who buy put options believe the price of the underlying asset will go down and they will be able to purchase (for reselling) another option on the same asset at a price lower than the current exercise price. A Put Option is the opposite of Call Opti |
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