Zerodha - Open Online Account

How do options work?

asked

Save over 60% on Brokerage

We can help you save between 60% to 90% brokerage fee & taxes. Contact us today...

NamePhone
EmailCity
State
Are you a day trader?

Options are derivatives of an underlying financial instrument like stocks, commodities, and currencies. A good analogy is the curd which is a derivative of milk. So, just like increase or decrease in the price of milk increases or decreases the price of curd, similarly, movements in prices of the underlying instrument affect the price of options.

Options are traded in exchanges MSE, MCX etc., like stocks and commodities. Every option contract mentions its strike price, premium, lot size and expiry date.

  • Strike price: The price at which the buyer and the seller of an option have agreed to enter the option contract.
  • Premium: The payment made by the buyer to the seller to earn his right to an option contract.
  • Expiration day: The last day that the option owner can exercise the right.
  • Lot Size: The fixed number of units of the underlying instrument that form part of a single Options contract.

Like any other business transaction, options trading includes buyers and sellers. The buyers of options have rights or a choice and sellers have obligations. The buyers have the choice to exercise his right to buy/sell option before expiry or else opt out and allow the option to expire.

Options are of two types: calls and puts. A Call option gives you the right to buy the option whereas a Put option gives you the right to sell the option.

There is no delivery of options. All transactions are settled in cash.

answered


Comments

No comments found. Be the first to post a comment.


List of all questions Ask your question


More Options Trading Basics Questions...

  1. How do options work?
  2. What are the different types of options?
  3. What is the strike price of an option?
  4. What is the Expiration Day of Options?
  5. How do I trade options?
  6. What is the difference between futures and options?
  7. How is Nifty traded?
  8. What happens if an option expires out of the money?
  9. Is there any Margin payable in Options?
  10. How are the Options contracts settled?
  11. What are Covered Options?
  12. What are Naked Options?
  13. What is an American Option?
  14. What is an European Option?
  15. What is In-The-Money (ITM), At-the-money-option (ATM) and Out-of-the-money-option (OTM) in Options?
  16. How to decide on whether should I buy or sell Call or Put options?
  17. Can I trade on options of any stock or Index?
  18. What is the difference between square off and exercise an Option?
  19. What is intrinsic value of the option? How to calculate intrinsic value of an option?
  20. What is time value of an Option?
  21. What are moving averages in options trading?
  22. What is Assignment in Options?
  23. How are options different from futures?
  24. What are the factors that affect the value of the premium of an Option?
  25. What are different pricing models for options?
  26. How the premium paid on options is calculated?
  27. What are Option Greeks and its use in Option trading?
  28. What is shorting/writing/selling in Options trading?
  29. I have bought an option & paid the premium for it, how to settle it?
  30. Do Option buyers have the same rights that as stock buyers?
  31. What is the contract cycle for Options in India?
  32. How does the probability of price movement affects the price of an option?
  33. What is the difference between trading stocks versus options?
  34. What is open interest and volume in options?
  35. What is the options market?
  36. What is nifty futures and options?
  37. What is an option trade?
  38. Is binary options trading legal in India?
  39. What are different types of exotic options?
  40. How to trade nifty Options intraday?
  41. Can I trade in US options from India?
  42. What are options trading hours in India?
  43. What is NSE option expiry time?
  44. Can I buy/sell Options in pre-market trading session?
  45. What is call & put option in bank nifty?
  46. What is the difference between selling a call option and buying a put option?
  47. What is NSE F&O lot size?
  48. What are options trading advantages?
  49. What is options trading after hours?
  50. What are options trading charges?
  51. What are options trading exchanges in India?
  52. What is the difference between options trading and Forex trading?
  53. What is the difference between options trading and stocks trading?
  54. What is the minimum amount required for Options trading?
  55. What are Index Options?
  56. What are weekly Options?
  57. What are Long Dated Options?
  58. How to identify if a particular option contract is American or European style?
  59. What are Option contract adjustments?
  60. Why The Intrinsic Value Of Options Contracts Can Never Be Negative?

List of all questions Ask your question








Search Chittorgarh.com:

Download Our Mobile App

Android App iOS App