Education Series

Education Series on Derivative Contracts


As mentioned earlier options are another important derivative product that has widely been used in the stock market. It gives good trading opportunities with higher leverage of funds and one could make attractive gains if trading positions were taken on the basis of good assessment as far as the probable movement of the asset value is concerned.

Option can be defined as a derivative contract which gives the holder a right, but no obligation, to buy or sell a specified quantity of the underlying asset on a future date at the predetermined price. Accordingly, an option contract consists the following.

Two parties, option buyer and option seller. Option buyer, also known as the option holder enjoys the right to purchase or sell the underlying as per the terms of the contract. However, it is not obligatory from his side that this right has to be executed. In other words, the buyer has absolute freedom to walk away from the contract if he feels that the terms of the contract are not in his favour.

Option Seller, also known as option writer is obligated to buy or sell as per the contract terms provided the buyer comes forward to execute his rights.

Underlying, The agreement is drawn on a specified quantity of an asset or assets and this is known as the underlying.

Strike Price, Both the parties have agreed to transact the business at a particular price and this will be recorded on the contract. This is called the strike price or the exercise price.

Expiry Date, The contract will be valid upto a certain point of time as recorded on the document and this is called the expiry date.