What Are Options?

This is in continuation of my last article on derivatives.

An option is nothing but a "Right Given to the Holder of the Option". It may be a "Right to Sell" Or "Right to Buy". The right to sell option is called a put option and the right to buy option is called a call option. 

When a person buys an option note only the right is transferred. It is not necessary that a person should execute the right on the maturity date. Then the question arises how a seller can make a profit out of it even if it is not executed on the maturity date. The buyer of the option has to necessarily pay a premium called option premium for buying that option. The buyer can buy a put option or a call option. The simple logic is a buyer who expects a price rise will buy a put option for a price determined today and a buyer who expects a price fall will buy a call option. Call and put options are there in stocks, commodities, etc. The next one is Swap which deals with currency rate exchanges that may not be that significant.

  PRABHU.S