Options are derivative instruments which give the holder of the option the right but not obligation to buy or sell the underlying asset, options are used for hedging as well as speculation by traders as well as investors to earn profit or minimize the losses on their investments. Options have come into existence recently and have generated tremendous interest among investors as well as traders. Given below are some of the important features of options –
- Options are of two types call and put options, call options are those which give the buyer of the option right to buy the asset at predetermined strike price irrespective of market price whereas put option give the buyer of option right to sell the asset at predetermined strike price irrespective of market price.
- Call options holders profit when the strike price of option is less than market price and they become zero if market price is more than strike price and put option holders profit when the strike price of option is more than market price and they become zero if market price is less than strike price.
- The value of option is dependent on the value of the underlying asset; however call and put option react differently. The value of call option increases when the value of underlying asset rises and decreases when the value of underlying asset falls whereas the value of put option rises when the price of underlying asset decreases and fall when the price of underlying asset increases.
- The buyer of the option has to pay premium to the seller of the option for the risks which the seller takes in selling the option, profits of buyer of the options are unlimited whereas the loss is limited to the amount of premium paid by the buyer whereas for the seller of option both profits as well losses are unlimited.
- Options are very flexible and a person can make many strategies like buying call and buying put option or selling call and buying put option or selling both call and put option or buying 2 call options and selling one put option. In simple words options can be used by investors or traders to make any strategy depending on market condition and outlook of the investor towards the market.
- Transactions costs like brokerage and taxes are higher in options trading then trading in futures or intraday trading.