Glossarytaught in DV1.02, DV1.05, DV1.03
Call and put options
Also called call option, put option, call options, put options, options contract, option contract, option premium.
Contracts that give the holder a right, but no obligation, to trade an asset at a fixed strike price. A call is the right to buy and a put the right to sell. The buyer pays a premium for the right; the seller collects it and takes on the obligation.
A call with a strike of ₹1,000 on a share trading at ₹1,080, priced at ₹110, has ₹80 of intrinsic value, the gain if exercised now, and ₹30 of time value, the price of the chance that the share rises further before expiry. If the share were at ₹950, the call would have no intrinsic value and its whole price would be time value.
A buyer's loss is limited to the premium and the gain can be large. A seller's position is the reverse, so selling options earns steady income until a large move erases it. Indian index options are among the most traded contracts in the world.
Price the time value before buying it.
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