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What are Options in stock market?

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Posted by : NIFM
4 October, 2013, 7:34 PM
An option is a contract which gives the buyer the right, but not the obligation to buy or sell shares of the underlying security at a specific price on or before a specific date. “Option” as the word suggests, is a choice given to investor to either honors the contract, or if he chooses exits from the contract. There are two kinds of options: Call Option and Put Options.   Call Options: A call option is an option to buy a stock at a specific price on or before a certain date. In this way, Call options are like security deposits. Call options usually increase in value as the value of the underlying instrument rises. When you buy a Call Option, the price you pay of it, called the option premium, secures your right to buy that certain stock at a specified price called the strike price. If you decide not to use the option to buy the stock, and you are not obligated to, your only cost is the option premium.   Put Options: Put Options are options to sell a stock at a specific price on or before a certain date. In this way, Put Options are like insurance policies. With a Put Option you can insure a stock by fixing a selling price. If something happens which causes the stock price to fall, and thus, damages you asset, you can exercise your option and sell it at its insured price level. If price of your stock goes up and there is no damage, then you do not need to use the insurance, and once again your only cost is the premium. This is the primary functions of listed options to allow investors ways to manage their risks in stock market. Technically, and options is a contract between two parties. The buyer receives a privilege for which he pays a premium. The seller accepts an obligation for which he receives a fee.

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