What are the different types of options?

There are two types of options - call options and put options

Call options give you the right, but not the obligation, to buy an option contract.

Put options give you the right, but not the obligation, to sell an option contract.

Example of a call option

You buy a call option on TCS for October at a strike price of Rs 2000 with a premium of Rs 200 for a lot size of 100 shares. This gives you the right to buy 100 shares of TCS at Rs 2000 anytime from now till the end of October. To acquire this right, you pay a premium of 100 X Rs 200 shares = Rs 20,000. Now, if the price of the option is above Rs 2100 at any time before expiry, you can exercise the options and earn profits. Assuming the option price is Rs 2150, you will receive Rs 150 (strike price - market price) X 200 shares `f= Rs 30,000.

Your profit is then Rs 30,000 - Rs 20,000 = Rs 10,000.

If your option has not performed well during this period and has remained below Rs 2000, you can choose to exit. In this case, you will only lose the premium amount of Rs 20,000.

Example of a put option

You buy a put option on TCS at a strike price of Rs 2000 with a premium of Rs 100 for a lot size of 100 shares. You pay a premium of Rs 100 X 100 = Rs 10000 when you buy the option. If the price of the TCS option remains below the strike price, you make a profit by selling the option. However, if the share price is above the strike price, you cannot exercise the right and only lose the premium.

Options can be further divided into American and European options.

American options can be exercised at any time before or at expiry. European options, on the other hand, are only exercised at the time of expiry.