Option Terminology

An Option is a contract between two parties in which buyer (holder) purchases the right (but not the obligation) to buy/sell shares of an underlying stock at a predetermined price from/to the option seller (writer) within a fixed period of time.

In the Index option underlying are Index such as Nifty, Bank Nifty, CNX IT etc. A stock option contract gives the holder the right to buy or sell the underlying shares at specified price.

The buyer of an Option is the one who buys the right but not the obligation to exercise his option on the seller/writer after paying Option premium. Writer / seller of a call/put option is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercise on him.

Call Option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price. Put Option gives the holder the right but not obligation to sell and asset by a certain date for a certain price.

Option Price/Premium is the price which the option buyer pays to the option seller. The expiration date is specified on Options contract is also known as the exercise date, the strike date or the maturity date. Strike price mentioned in the option contract is also known as the exercise price.

American Option can be exercised at any time up to the expiration date. A European option can be exercised only on expiration date itself.