2.1 – Decoding the basic jargon
Before we proceed into the depth of how Option trading works let us decode a few basic option jargons. Discussing these jargons at this stage will not only strengthen our learning but will also make the forthcoming discussion on the options easier to comprehend.
In the next video, we will attempt to understand the call option in a bit more detail.
We recommend reading this chapter on Varsity to learn more and understand the concepts in-depth.
Key takeaways from this chapter
- It makes sense to buy a call option only when one anticipates an increase in the price of an asset
- The strike price is the anchor price at which both the option buyer and option writer enter into an agreement
- The underlying price is simply the spot price of the asset
- Exercising an option contract is the act of claiming your right to buy the options contract at the end of the expiry
- Similar to futures contracts, options contracts also have an expiry. Options contracts expire on the last Thursday of every month
- Options contracts have different expiries – the current month, mid-month, and far month contracts
- Premiums are not fixed, in fact, they vary based on several factors that act upon it
- Options are cash-settled in India.