What Are Options?

Options are tradable contracts that allow investors to make predictions about whether the price of an asset will increase or decrease at a specific point in the future without having to actually purchase the asset in question. For instance, Nifty 50 options let traders guess the future course of this benchmark stock index, which is frequently used as a proxy for the whole Indian stock market.

At first glance, options seem a little counterintuitive, but they’re not as complicated as they appear.
To understand options, you just need to know a few key terms:

  • Derivative : Options are what is referred to as a derivative, which means that the value of these contracts is derived from another asset.Consider stock options, where the contract's value is determined by the price of the underlying stock.

  • Call option and put option : A put option enables you to sell a securities at a future date and price, whereas a call option provides you the chance to acquire it at a predetermined price by a given date. Date of expiration and strike price. A strike price is that previously mentioned preset price. The option may be exercised at the strike price up until the option contract's expiration date.

  • Premium : The cost to buy an option is known as a premium, and it is determined by the price and values of the underlying securities.

  • Intrinsic value and extrinsic value : The difference between the strike price of an option contract and the current value of the underlying asset is known as intrinsic value. Extrinsic value refers to additional elements that influence the premium outside those taken into account by intrinsic value, such as how long the option is valid for.

  • In-the-money and out-of-the-money : An option is said to be in-the-money (profitable) or out-of-the-money (unprofitable) depending on the price of the underlying securities and the amount of time until expiration.

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