INTRODUCTION TO OPTIONS
An option
is a contract written by a seller that conveys to the buyer the right — but not
the obligation — to buy (in the case of a call option) or to sell (in
the case of a put option) a particular asset, at a particular price (Strike
price / Exercise price) in future. In return for granting the option, the
seller collects a payment (the premium) from the buyer. Exchange-traded
options form an important class of options which have standardized contract
features and trade on public exchanges, facilitating trading among large number
of investors. They provide settlement guarantee by the Clearing Corporation
thereby reducing counterparty risk. Options can be used for hedging, taking a
view on the future direction of the market, for arbitrage or for implementing
strategies which can help in generating income for investors under various
market conditions.