Options Trading India
When it comes to trading in NSE, out of the total daily trade turnover over 80% of the turnover arises due to trading in derivatives i.e. Futures and Options. While we will cover Futures agreement some other time, options trading is our focus for this article. Let’s take a detailed look at options trading.
Table of Contents
What are Options Contracts?
Options are a contractual agreement between buyer and seller. A contract to buy or sell a particular amount of the asset somewhere in the future at predetermined price. There are two parties for options contract – buyer and seller. An options contract grants obligation to options seller to deliver the instrument as per contract price. An options contract grants option buyer the right and not obligation to exercise the contract.
Parties to Options Contract
There are two parties to an options trading contract –
- Option Buyer or Option Holder – Option Buyer is a person who purchases the option to buy or sell the underlying asset at a particular price in the future. An option buyer buys the options contract from options seller.
- Option Seller or Option Writer – Option Seller is a person who has agreed to buy or sell the underlying asset if option buyer exercises the option.
Types of Options
- BASED ON DATE OF EXPIRY EXERCISE 1. European Option – Option under which option holder can exercise his right only on the expiry date 2. American Option – Option under which option holder can exercise his right early before the expiry date or on date of expiry.
- BASED ON UNDERLYING ASSETS 1. Index – Option contract where underlying asset in index. E.g – Nifty 50, Bank Nifty 2. Stock – Option contract is on the underlying value of a particular stock. E.g- Option Contract based on Tata Consultancy Services’ Stock Price 3. Interest Rate Options – Option contract where underlying asset in interest rate. 4. Currency Options – Option contract where underlying asset is currency. E.g- Dollar, Rupee
- BASED ON NATURE 1. Call Option – Call option grants Option Buyer the right to buy an asset. Call Option Buyer is bullish on the underlying value of the asset. Call Seller is obligated to sell if call buyer exercises his option. Call Seller is bearish or neutral on the underlying value of the asset. 2. Put Option – Put option grants Option Holder the right to sell an asset. Put Option Buyer is bearish on the underlying value of the asset. Put Seller is obligated to buy the asset if put buyer exercises his option. Put Seller is bullish or neutral on the underlying value of the asset.