Discussion on Derivatives

Friends

Let me answer Neha's question...There are two types of option - call option and put option .

A call option gives the buyer the right to purchase an asset for a specific price called strike price by paying an amount right now called the premium. Lets take a hypothetical example , I have a view that X Ltd stock may rise in near future.Currently X Ltd. is trading at Rs. 100.I buy a call option on X Ltd stock with a strike price of Rs. 90( i.e I have a right to buy the stock @ Rs. 90 on expiration) by paying a premium of Rs 10. Now at expiration if the market price of the stock increases to say Rs. 120 , I will exercise this option. This is because I have purchased the right to buy it @ Rs. 90. However if the stock price falls say to Rs 70 , I will not exercise this right. In this case I will lose the premium which was paid initially i.e Rs. 10 at the time of buying this option.

In contrast , put option gives the holder the right to sell an asset for a specific strike price on a specified expiration date . Say a put option which expires in May on Y Ltd. with strike price of Rs. 90 entitles its owner to sell Y Ltd . stock at Rs. 70 at expiration even when the market price is less than Rs. 90. Ofcourse premium is to be paid buy this put option.

Hope this helps Neha..Please free to shoot further questions...Hope to see others participation as well.

Cheers

Shelly Nayyar