We recommend reading this chapter on Varsity to learn more and understand the concepts in-depth.
Key takeaways from this chapter
- Options are traded in the Indian markets for over 15 years, but the real liquidity was available only since 2006
- An Option is a tool for protecting your position and reducing risk
- A buyer of the call option has the right, and the seller must make delivery
- The Optionhttps://zerodha.com/varsity/chapter/call-option-basics/ is only given to one party in the transaction (the buyer of a vote)
- The option seller is also called the option writer
- At the time of the agreement, the option buyer pays a certain amount to the option seller; this is called the ‘Premium’ amount
- The deal happens at a pre-specified price, often called the ‘Strike Price.’
- The option buyer benefits only if the asset’s cost increases higher than the strike price.
- If the asset price stays at or below the strike, the buyer does not benefit; for this reason, it always makes sense to buy options when you expect the price to increase.
- Statistically, the option seller has a higher odds of winning in a typical option contract.
- The directional view must pan out before the expiry date; otherwise, the Option will expire worthlessly.