Part 9 Trading Masterclass With Experts

Introduction to Options

An option is a type of derivative contract. A derivative derives its value from an underlying asset, which could be a stock, index, commodity, currency, or bond. When you buy or sell an option, you don’t directly own the asset but instead own the right to buy or sell it at a pre-agreed price within a specific period.

At its core, an option is a contract between two parties:

The buyer (holder) of the option, who pays a premium for rights.

The seller (writer) of the option, who receives the premium and carries obligations.

Unlike shares, where ownership is straightforward, options deal with probabilities, rights, and conditions. This makes them flexible but also more complex.

Key Features of Options

Before diving deeper, let’s simplify the main features:

Underlying Asset – The financial instrument on which the option is based (e.g., Reliance Industries stock, Nifty50 index).

Strike Price (Exercise Price) – The price at which the underlying asset can be bought or sold.

Expiration Date (Maturity) – The last date the option can be exercised.

Option Premium – The cost of buying the option, paid upfront by the buyer to the seller.

Right but Not Obligation – The buyer can choose to exercise the option but is not compelled to.