An option is a privilege sold by one party to another that offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security at an agreed-upon price during a certain period of time or on a specific date. Options are extremely versatile securities that can be used in many different ways. Traders use options to speculate, which is a relatively risky practice, while hedgers use options to reduce the risk of holding an asset.

What are the types of Options?

There are two types of Options: 1) Call Option 2) Put Option

Call Option:

A call option is a financial contract between two parties. The buyer of the option has the right but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying instrument) from the seller of the option at a certain time for a certain price (known as the strike price). The seller assumes the corresponding obligations.

"Selling" in this context is not the supplying of a physical or financial asset (the underlying instrument), rather it is the granting of the right to buy the underlying, against a fee - the option price or premium.

Exact specifications may differ depending on option style. However, options are traded on many other financial instruments such as interest rates as well as on physical assets like gold or crude oil.

Let's take an example: A Satyam 260 Feb call option gives the buyer the right to buy Satyam at a price of Rs 260 per share on or before the last Thursday of February. The call option seller is under the obligation to deliver shares whenever the call option buyer exercises his right. Call options are also called teji in the Indian markets.

Put Option

A put option is a financial contract between two parties. The put allows the buyer the right but not the obligation to sell a commodity or financial instrument (the underlying instrument) to the seller of the option at a certain time for a certain price (the strike price). The seller assumes the corresponding obligations.

Note that the seller of the option undertakes to buy the underlying. In exchange for being granted this option, the buyer pays the seller a fee.

Exact specifications may differ depending on option style. An European put option allows the holder to exercise, i.e. to sell, on the delivery date only. An American put option allows exercise at any time during the life of the option.

Exact specifications may differ depending on option style. However, options are traded on many other financial instruments such as interest rates as well as on physical assets like gold or crude oil.

Let's take an example: Suppose you have the right to sell 1000 shares of Satyam at Rs. 140 per share on or before April 28, 2002. In other words you are a buyer of a put option of Satyam. The option gives you the right to sell 1000 shares. The seller of this put option who has given you the right to sell to him is under obligation to buy 1000 shares of Satyam at Rs. 140 per share on or before April 28, 2002 whenever asked. Put options are also called mandi in Indian markets.