Call option premium accounting
A call option is the right, but not an obligation to buy something at a fixed price — the strike price at anytime within the specified time period. The underlying is usually either an exchange traded stock or a commodity. Note that an option gives the buyer the right to buy or sell the underlying contract at a predetermined price.
The specific price at which the underlying can be bought or sold is referred to as the strike price or exercise price of the option. Options only have a limited life-span. In the above definition of an option the buyer of an option can exercise the right within a specified time period. The exercise period of the option specifies when the option expires and can no longer be traded.
The exact date in which the option expires is set by the exchanges and differs from one exchange to another. Different month options are entirely different instruments, so a June option is a separate and distinct contract from a July option.
Investors buy call options if they think that the price of the underlying will go up and buy put options if they think the price of the underlying will go down. The price paid for acquiring the right to buy is called the call option premium. Whether the investor has the right to buy or to sell depends on which type of option the investor buys. The purchaser of a call option has the right to buy the underlying asset.
The purchaser of a put option has the right to sell the underlying asset. Note that puts and calls are mutually exclusive. A call option does not offset a put option and vice versa. In the National Stock Exchange, India, the quotes are available for the current month, near month and far month.
For example, when investors trade in early May, they get quotes for May, June and July. The settlement period is the last Thursday of the relevant month. So, if an investor buys 1 lot of May-X1 — Rs. A put option is the right, but not an obligation to sell something at a fixed price — the strike price at anytime within the specified time period.
The price paid for acquiring the right to sell is called the put option premium. When the investor buys a put, then the investor has the right to sell the underlying. Note that the investor is dealing with different instruments here. The investor is buying a put instrument that gives the right to sell a different and distinct instrument which is the underlying asset. Components of an Equity Options Contract. This site rocks the Classic Responsive Skin for Thesis. Call and Put Options by R.
Venkata Subramani on March 5, Call Option A call option is the right, but not an obligation to buy something at a fixed price — the strike price at anytime within the specified time period. Put Option A put option is the right, but not an obligation to sell something at a fixed price — the strike price at anytime within the specified time period.
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