What is the meaning of options in security market?

What is the meaning of options in security market?

Option is an agreement between two parties offering to buy or sell a security (a stock, bond, commodity or other instruments) from or to the other party at a specified price within a specific time period. In option contracts, there is no obligation on the part of buyer or seller to buy or sell the asset at ‘exercise price’; hence the parties to the deal call it an “option.”

Call option: Call option is the option of the buyer to buy an asset at a specified price and time.

Put option: Put option is the right of a seller to sell an asset at a specified price and time.

Obligations of buyer or seller under option contract:

In options, the parties to the contract will make the transaction under option, only if the deal is profitable to them.

In case., (when the transaction under option does not take place) only the option money or premium, (the difference between the price fixed under option contract and the price of the security on delivery date), is only payable to the  option holder. The agents of trade and industry normally hedge, the assets by way of options, against the risk of wide fluctuations in prices. The options also allow dealers and speculators to gamble for large profits with limited liability. The maximum option period allowed is one calendar month. If the delivery date or the last date of the option happens to be a holiday, the delivery has to be effected on the preceding working day.

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