An option contract is a standardized financial agreement that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified strike price on or before a certain expiry date. These contracts are traded on exchanges like NSE, with clearly defined terms, allowing traders to hedge risk or speculate on price movements.
Key Points / Significance:
- Legally binding contract with asymmetrical rights (buyer has right, seller has obligation).
- Used for hedging, speculation, and income strategies.
- Allows defined risk exposure for option buyers.
Underlying Asset
An option derives its value from an underlying asset, which could be a stock (e.g., INFY, RELIANCE) or an index (e.g., NIFTY, BANKNIFTY). The price movement of the underlying directly affects the value of the option contract.
Key Points:
- Determines the asset on which the right is exercised.
- Can be index-based or stock-based.
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Must be actively traded and liquid to qualify for options trading.
Examples:
- NIFTY Options – based on NIFTY 50 index.
- RELIANCE Options – based on RELIANCE stock.