#Trading options how to

Out-of-the-money (OTM) option is an option that would lead to negative cash flow if it were exercised immediately.įor example, in the previous case, if the index value is lower than the strike price (spot price < strike price), the option is said to be OTM.Want to learn how to trade stock options? You’ve come to the right place. At-the-Money OptionĪt-the-money (ATM) option is an option that leads to zero cash flow ( a situation of no profit/no loss) if it were exercised immediately.įor example, in the previous case, if the current index value is equal to strike price (spot price = strike price), the option is ATM. In-the-money (ITM) option is the one that leads to positive cash flow to the holder if it was exercised immediately.įor example, in a call option on the index, if the current index value is higher than the strike price (spot price > strike price), the option is said to be in-the-money. Types in Options Tradingġ.Premium -The price that the option buyer pays to the option seller is referred to as the option premium.Ģ.Expiry date – The date specified in an option contract is known as the expiry date or the exercise date.ģ.Strike price – The price at which the contract is entered is the strike price or the exercise price.Ĥ.American option – The option that can be exercised at any date until the expiry date.ĥ.European option – The option that can be exercised only on the expiry date. Put Option – An option that offers the holder, the right but not the obligation, to sell an asset at a set price before a certain date.

Writer/seller of an Option – The one who receives the premium of the option and thus is obliged to sell/buy the asset if the buyer of the option exercises it.ģ.Call Option – An option that provides the holder the right but not the obligation to buy an asset at a set price before a certain date.Ĥ.

Participants in Optionsġ.Buyer of an Option – The one who by paying the premium, buys the right to exercise his option on the seller/writer.Ģ. The regulator has also authorized the American style of settlement for such options. The contract gives the holder the right to buy or sell the underlying shares at the specified price. These are options on the individual stocks (with stock as the underlying). Examples of such options include Nifty options, Bank Nifty options, etc. In India, the regulators authorized the European style of settlement. These are the options that have an index as the underlying. Options can be used to hedge, take a view on the future direction of the market, for arbitrage, or for implementing strategies that could help in generating income for traders. These instruments provide settlement guaranteed by the clearing corporation, thereby reducing counterparty risk. Utility of the Exchange-Traded OptionsĮxchange-traded options constitute an important class of options that have standardized contract features and trade on public exchanges, facilitating the investors. In return for granting the option, the seller collects a payment (known as a premium) from the buyer. An option is a contract that is written by a seller that conveys to the buyer the right - but not an obligation to buy (for a call option) or to sell (for a put option) a particular asset, at a specific price (strike price/exercise price) in future.

Trading options