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Option Terminology
Now, let us discuss the various terms associated with the options contracts.
Option Contract:
An option contract is an agreement between two parties to buy/sell an asset (stock or futures contract as an example) at a fixed price and fixed date in the future.
Underlying Asset
The underlying asset is a specific asset on which an option contract is based. The contract value is determined by the value of the underlying – so in our example the underlying asset is the stock.
Strike /Exercise Price
The specific asset price at which the asset can be bought or sold when the contract is exercised is called Strike Price i.e., ₹750/- in this case.
Expiration Date
The last day an option exists. It is generally the last Thursday of the month in case of stocks.
Options Premium
The amount per share that an option buyer pays to the seller is called option premium – ₹50/- in our example.
Option Buyer
The buyer of the option gains the right, but not the obligation, to engage in some specific transaction on the asset. In our example- Saksham is the buyer of the option.
Option Seller
The seller incurs the obligation to fulfill the transaction if so requested by the buyer.
Buyers and Writers
The people who buy the options are called ‘buyers’ or ‘holders’, and those who sell the options are called ‘sellers’ or ‘writers'. Buyers are said to have ‘long’ positions and sellers are said to have ‘short’ positions.
