Options

Introduction

• Options are financial instruments or a contract or a derivative instrument that gives the holder the contract to buy or sell a specified quantity of the underlying assets at a particular price on or before a specified time period.
• Options give the holder a right but not the obligation to buy or sell the underlying assets.
• The underlying assets may be physical commodities like gold, oil, etc. or any financial instruments like stocks, bonds, etc.
• Options are available in the form of stock options, bond options, currency options, stock index options, etc.

Types of Options

• Call Options: It is a right to buy an underlying asset at a specific price on or before a particular day by paying a premium. 
• Put Options: It is a right to sell an underlying asset at a specific price on or before a particular day by paying a premium.

• Other:

1. American-style Options: These can be exercised at any time before or on the expiry date.
2. European-style Options: These can be exercised only at the maturity date of the option.

Features of Options

• Options can be over-the-counter and exchange traded.
• Options have a fixed maturity date on which they expire.
• The value of options depends on the exercise price.
• Options lose value over time.
• Holders of Options are not legally bound to fulfill the terms of the contract which sets Options apart from other classes of Derivatives.
• When Options have higher strike prices than their underlying assets, they are called Out of Money (OTM) Options. Strike Price refers to the price at which the holder can exercise their Options.