An option is a choice an investor has while dealing with stock market. The price of an option is intrinsically linked to the price of something else because of which it is considered as a type of derivative security. These are kind of contracts that offer the right but no obligation to sell or buy an asset, equity or index on or before a particular date at a set price. People buying options are known as holders and those who sell options are known as writers.
The privilege to buy is known as call option and to sell is known as put option. Options are different from futures or forwards since the latter confer both the right and obligation of buying and selling in the future. Platforms like Infinity App can be used to access options.
Call And Put Option
A call option can be considered as a deposit for the future. For instance, a land developer who wants the right to buy a land can purchase a call option from the owner of the land with a fixed price at any point in the next 2 years by paying a down payment to lock in the right. This cost is called the premium. Now, within the given duration the developer buys the land at the same price even if it has doubled. But if the developer does not buy the land within the given time slot then the option will expire and he will have to buy the land in the market price. Such call options can give you a long position in the market.
But a put option can be considered as an insurance policy. Say for example, if a land developer holds a large portfolio but concerned that a recession can take place in next 3 years. So, he will try to ensure that even if a recession hits the market, his portfolio should not bear a loss for more than 10-15 percent of its value. Such put options can give you a short position in the market.
So, basically while buying an option, you earn a right to do something with it but this can become useless if it crosses the expiration date. In such cases, you end up losing 100 percent of the money you invested for paying the option premium. It is just a contract dealing with an asset such as stock or stock index. These options are usually traded very actively on all types of financial securities like foreign currencies, commodities, bonds and other derivatives.