Option is a different type of investment, which is very useful and can provide real protection to the investors when the markets are going down. At the same time, the characters of the options are designed in such a manner that they meet the investors’ need in any situation. So that it can be used for both as a protective measure and also as an investment tool, which can produce high yields.
Options are essentially securities and provide the holder with the right to trade an asset on certain time and value. On the other hand the holder is not bound to do the trade and the whole process of trading depends on the opinion of the holder. If the holder does not sells the option on a particular date, the price of the option becomes zero and the holder faces 100% loss of the price, which has been paid for the option. But in some particular situations, the holders follows this type of strategy.
The option gets or derives its value from the stock or the index and thus it is dependent on some other assets for its value. For this reason, options are also called derivatives. There are two types of option available in the market. These are called Call and Put.
The ‘call’ provides the holder with the right to purchase a particular security. But the price for purchasing the security, the time of executing the purchase and the amount of the security, all remain fixed. At the same time, the holder is not bound to do the trade and it all depends on his or her own concern. With the growth in the stock price, the call also gains some extra value and because of this the holders always expect the stock value to rise. There are several exchanges that uses the call period as an important time to match and carry out a bulk of orders before the opening and closing.
On the other hand the ‘put’holders always expect the stock prices to go down because in such situations, the put-holders can have extra profit. At the same time it provides the holder with the right to sell a particular amount of stock (underlying asset) at a certain price and time.
| Option (Meaning, Definition and Types)
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