A person bullish on an asset buys a call option on it, like Nifty or dollar -rupee call. A per son bearish an asset buys a put on it.
2. What is the cost to buy one ?
Say you're bullish on Nifty. You think Nifty , which closed at 8139 on Friday will hit 8200 this Friday will hit 8200 this week, you buy an 8200 Nifty call at `3,825 (price per share of 75 lot is `51). That is to take exposure to 1 Nifty lot (75 shares) worth `6.15 lakh you got to put a margin of less than 1%.
If Nifty jumps by 61 points to 8200, you make `4,575 gross return on investment of `3,825 as premium (price of option). But say by December 29, when the current series of options expire, if Nifty re mains below 8200, you could forfeit the entire premium.
3. Who sells you the options?
The seller is a rich investor or a broker or even an FPI. The counterparty is anonymous.The seller collects premium from you and gains when the premium erodes.
4. Can you get delivery in options?
Options traded in exchanges in India are normally cash settled, with buyer having the right but not obligation to give or take delivery.
5. An Example?
Say I have 100 shares of `10 each.
I am worried `10 could become say `8. So, I buy a put option that allows me to sell 100 shares at `10 each.If the price declines to `8 by expiry , the put seller is obliged to buy the shares from me at `10. So, I make a gain of `2 per share if the share declines thus.
Similarly , if I feel a share will rise from `100, I buy a call option on the share which lets me buy it at `100 on expiry of the contract even if it rises to `105. In that case, the call seller is obliged to sell me the share at `100. I buy the share from him for `100 and sell it in the market for `105 making `5 in the bargain. In reality , only the difference is exchanged here.Also, the buyer could forfeit the premia in case the asset goes the other way .
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