Options contracts or agreement are instruments that provide the holder of an instrument the correct to sell or buy the underlying benefit at a predetermined rate. An option can be a “call” option or a “put” option.
A call option provides the buyer, the correct to buy the benefit at a given rate. This “given price” is called “strike rate”. It must be noted that while the owner of the call option has a correct to demand the sale of benefit from the seller side, the seller has simply the compulsion and not the correct. For eg: if the purchaser wants to purchase the benefit, the seller has to vend it. He does not have an accurate.
Similarly, a “put” option provides the buyer a correct to sell the benefit at the “strike price” to the buyer. Here, the buyer has the accurate to sell and the seller has the compulsion to buy.
So, in any options agreement, the correct to put into effect the option is vested with the purchaser of the agreement. The seller of the agreement has only the compulsion and no correct. As the seller of the agreement bears the compulsion, he is paid a rate called as “premium’. Therefore the price that is paid for buying an option contract is called as “premium”.
The purchaser of a “call option” will not use his option (to acquire) if, on expiry, the rate of the benefit in the SM (Spot Market) is less than the strike rate of the call.
For eg: X bought a entitle at a strike rate of Rs 500/-. On expiry, the rate of the benefit is Rs 450/-. A will not use his call. Because, he can acquire the similar benefit from the marketplace at Rs 450/-, rather than the paying Rs 500/- to the seller of the option.
The purchaser of a “put option” will not use his option (to sell) if, on end, the rate of the benefit in the SM is more than the strike rate of the call.
For eg: Y bought a put at a strike rate of Rs 600/-. On ending the rate of the benefit is Rs 619/-. A will not use his put option. Because. he can vend the similar asset in the trading market at Rs 619/-, rather than providing it to the vendor of the put option for Rs 600/-.
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