1. Options are financial instruments based on underlying securities like an index or a stock.
2. Call options allow the holder to buy the asset at a stated price within a specific timeframe and put options allow the holder to sell the asset at a stated price within a specific timeframe.
3. There are two parties – the option seller (option writer) and the option buyer (option holder).
4. The buyer of the option has the right, but not the obligation to exercise the contract and buy or sell the underlying asset at an agreed upon price.
5. The option buyer pays a premium to the option seller for the right to exercise the option.
(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)