• Terms used in Option trading

    Strike Price Denotes the price of the underlying share or index at which the buyer of the option has a right to purchase or sell at the time of expiry. It stays unchanged with the trading of a particular option.

    Expiry Date refers to the date when the option will be expired settled between the buyer and seller. At that time the buyer can choose to exercise the option if it is in-the-money or simply ignores the same if it is at out-of-the-money. In India, the expiry date should be the last Thursday of each month and the options with the nearest expiry date will have maximum liquidity.

    The current market price refers to the current market price of an option. It varies with the trading in the market and is used to determine the premium of an option.

    Premium refers to the premium paid by the option buyer to the option seller or writer. Premium gives the right but not obligation to the buyer to exercise the option at the end of expiry date. This premium is being traded in the stock market. Trading on premium value is done based on the anticipation of the index value at the end of the expiry date and it depends on the other parameters.

    American Options are those which can be exercised anytime up to the exercise date depending on the buyer’s choice. If the buyer feels that the he is at maximum benefit even before the expiry date, he can choose to exercise the option immediately; the seller has to meet the obligation if the buyer chooses so. Because of this benefit, buyer has to pay more premium for American type options than the European type options.

    European Options are those which can be exercised only on the contract’s expiration date. Buyer cannot exercise the option before the exercise date (expiry date) even if he is at maximum profit even before the expiry date. Because of this restriction, the premium for the European Option is much lower compared to American options.

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