Understanding of Options Basics - Defination, Types, Examples

Options are such financial assets which provide limited payoff. It is an agreement between two parties to buy/sell an asset at a fixed price and fixed date in the future.

The buyer of the option:

1. Gains the right, but not the obligation, to execute the contract
2. Pays premium for acquiring the right
3. Maximum loss is the premium paid whereas profits are unlimited

The seller of the option:

1. Incurs the obligation to fulfill the transaction if so requested by the buyer
2. Receives the premium
3. Maximum profit is restricted to the premium received whereas losses are unlimited

Options are of two types:

1. Call Option
2. Put Option

Check out NSE Academy Certified Option Strategies for better understanding of options