Derivatives Market: Terminology in Derivatives - Axis Direct
May 28, 2018 | Source: economictimes.com
A derivative is a contract between two parties which derives its value/price from an underlying asset. The most common types of derivatives are futures, options, forwards and swaps.
Let us understand the most common terminology associated with derivatives.
Call option: It is the right to buy a particular stock or index at a future date—settlement date—at a pre-fixed price (strike price). The market price for call option is called premium.
Put option: It is the right to sell a particular stock or index at a future settlement date at the pre-fixed strike price. The market price for the put option is also called premium.
Option writing: While the option buyer gets the right to buy or sell a security, there is no obligation on him to do so. The option writer, on the other hand, has an obligation to trade and his reward is only the premium. So, option writers take unlimited risk for limited reward.
At the money options: Options where the strike price is same as the price of the underlying security.
In the money options: Put options where strike price is above the price of the underlying security or call options where strike price is below price of the underlying security. Here premiums will be higher.
Out of the money option: Put options where strike price is below the price of the underlying security or call options where strike price is above of the underlying security. Here the premiums will be lower.
Market lot: You can’t buy one share in the Futures & Options segment, and the minimum number of shares you can buy is called market lot.
Time decay: Since the option contract is for specific number of days, its value keeps on coming down every day and the same is called time decay.