WHAT IS AN OPTION?

[sunandaC]

WHAT IS AN OPTION?

Option is a legal contract in which the writer of the contract grants to the buyer, the right to purchase from or to sell to the writer a designated instrument or a scrip at a specified price within a specified period of time.

The right to purchase a specified stock is called the call option, while the right to sell a specified stock is called a put option.

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Example
Suppose a writer of an option writes a contract, which conveys or grants to the buyer the right to bur 100 shares of ITC from him, i.e. from the writer at the rate of Rs. 650 per share. This option is called a call option and is designated as 100 ITC 650 call.

Similarly, if a writer writes an option which grants to the buyer the right to sell to the writer 100 shares of ITC at Rs. 650 per share, such an option is called a put option and is designated as 100 ITC 650 put.

It should be noted that in a call option transaction, there is not put option involved. The writer is writing or selling a call option and the buyer is buying a call option. Similarly, in the case of a put option transaction there is no call option involved. The writer is writing or selling a put option and the buyer is buying a put option.
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[dimpy.handa]

The current price of XYZ Corp stock is Rs.45 per share, and investor 'Chris' expects it will go up significantly. Chris buys a call contract for 100 shares of XYZ Corp from 'Sumner,' who is the call writer/seller. The strike price for the contract is Rs.50 per share, and Chris pays a premium upfront of Rs.5 per share, or Rs.500 total. If XYZ Corp does not go up, and Chris does not exercise the contract, then Chris has lost Rs.500. However, XYZ Corp stock does go up -- to Rs.60 per share before the contract is expired. Chris exercises the call by buying 100 shares of XYZ from Sumner, for a total of Rs.5,000. Chris sells the stock in the market, at a total price of Rs.6,000. Chris has paid a Rs.500 contract premium plus a stock cost of Rs.5000, for a total of Rs.5500. Chris has earned back Rs.6000, for a net profit of Rs.500. Sumner, however, did not do so well. Sumner did not already own XYZ Corp stock, so when Chris exercised the contract Sumner had to buy the stock on the open market, at Rs.6000. Sumner had already earned the Rs.500 premium for the contract and Rs.5000 from Chris on selling the stock, so the total loss for Sumner was Rs.500

 

[rosemarry2]

WHAT IS AN OPTION?

Option is a legal contract in which the writer of the contract grants to the buyer, the right to purchase from or to sell to the writer a designated instrument or a scrip at a specified price within a specified period of time.

The right to purchase a specified stock is called the call option, while the right to sell a specified stock is called a put option.

----------------------------
Example
Suppose a writer of an option writes a contract, which conveys or grants to the buyer the right to bur 100 shares of ITC from him, i.e. from the writer at the rate of Rs. 650 per share. This option is called a call option and is designated as 100 ITC 650 call.

Similarly, if a writer writes an option which grants to the buyer the right to sell to the writer 100 shares of ITC at Rs. 650 per share, such an option is called a put option and is designated as 100 ITC 650 put.

It should be noted that in a call option transaction, there is not put option involved. The writer is writing or selling a call option and the buyer is buying a call option. Similarly, in the case of a put option transaction there is no call option involved. The writer is writing or selling a put option and the buyer is buying a put option.
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Hey buddy,

Please check attachment for Trading Options for Dummies by George Fontanills, so please download and check it.