Equity option cash is a contract between two parties in which the stock option buyer (holder) purchases the right (but not the obligation) to buy/sell 100 shares of an underlying stock at a predetermined price from/to the option seller (writer) within a fixed period of time.

In transactional terms, Options are trading instrument for people who don’t like to invest heavily in stocks. It is basically an agreement between two parties to sell or purchase the right to an underlying stock. For e.g. The buyer of an Option pays a premium to the seller with hope or speculation that the stock price may move up before the expiration of the agreement or vice versa.

With Options, you have an opportunity to practice a wide range of strategies with limited/unlimited risk/profit potential, create hedging and speculative trading opportunities for yourself.

How are Options different from Stocks?

The Options contract has an expiration date, unlike stocks. The expiration can vary from weeks, months to years depending upon the regulations and the type of Options that you are practising. Stocks, on the other hand, do not have an expiration date.

Unlike Stocks, Options derive their value from something else and that’s why they fall under the derivatives category. Options are not definite by numbers like Stocks. You can profit from a drop in the price of an underlying stock. In fact, you can profit in all directions depending upon the type of position or strategy you are holding, unlike stocks where you make a loss when the stock price goes downwards. Options owners have no right (voting or dividend) in a company, unlike Stock owners.

Characteristics of Options

It is quite often that some people find the Option’s concept difficult to understand though they have been already following it in their other transactions for e.g. car insurance or mortgages.

Type of Options

In a true since there are only two types of Options i.e Call & Put Options rest all are the combination of strategies based on these prime categories.

Call options allow the holder to buy the asset at a stated price within a specific timeframe.

Put options allow the holder to sell the asset at a stated price within a specific timeframe.

Each option contract will have a specific expiration date by which the holder must exercise their option. The stated price on an option is known as the strike price. Options are typically bought and sold through online or retail brokers.

What is Strike Price in Options Trading?

The Strike Price is the price at which the underlying stocks can be bought or sold as per the contract. It is often referred to as exercise.

In options trading, the Strike Price for a Call Option indicates the price at which the Stock can be bought (on or before its expiration) and for Put Option, it refers to the price at which the seller can exercise its right to sell the underlying stocks (on or before its expiration)

Premium

Since the Options themselves don’t have an underlying value, the Options premium is the price that you have to pay in order to purchase an Option. The premium is determined by multiple factors including the underlying stock price, volatility in the market and the days until the Option’s expiration.