{"id":22350,"date":"2022-04-23T12:47:53","date_gmt":"2022-04-23T12:47:53","guid":{"rendered":"https:\/\/www.5paisa.com\/finschool\/?post_type=markets&#038;p=22350"},"modified":"2025-10-10T21:27:21","modified_gmt":"2025-10-10T15:57:21","slug":"what-are-options","status":"publish","type":"markets","link":"https:\/\/www.5paisa.com\/finschool\/course\/option-trading-course\/what-are-options\/","title":{"rendered":"What Are Options: Introduction, Definition &#038; Types"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"22350\" class=\"elementor elementor-22350\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-23ba90b elementor-section-full_width tab_container elementor-section-height-default elementor-section-height-default\" data-id=\"23ba90b\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-b6a6f9f\" data-id=\"b6a6f9f\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-inner-section elementor-element elementor-element-e0f864e elementor-section-full_width elementor-section-height-default elementor-section-height-default\" data-id=\"e0f864e\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-wide\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-7efb245 chapters_list\" data-id=\"7efb245\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-33d4575 elementor-widget elementor-widget-shortcode\" data-id=\"33d4575\" data-element_type=\"widget\" data-widget_type=\"shortcode.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div class=\"elementor-shortcode\">\t<script>\n\t\tjQuery(document).ready(function(){\n\t\t\tjQuery(\"#post_chapters a[href*='\" + location.pathname + \"']\").addClass(\"current\");\n\t\t})\n\t<\/script>\n\t<div class=\"desktop_chapters\"><div id=\"post_chapters\"><div class=\"post_chapters-heading\">Chapters<\/div><ul><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/option-trading-course\/what-are-options\/\">What Are Options<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/option-trading-course\/components-of-an-option-contract\/\">Components Of An Option Contract<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/option-trading-course\/methods-to-value-an-option\/\">Methods To Value An Option<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/option-trading-course\/what-are-call-options\/\">What Are Call Options<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/option-trading-course\/what-are-put-options\/\">What Are Put Options<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/option-trading-course\/summarizing-the-difference-between-call-and-put-option\/\">Summarizing The Difference Between Call & Put Option<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/option-trading-course\/what-are-option-greeks\/\">What Are Option Greeks<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/option-trading-course\/different-types-of-option-trading-strategies\/\">Different Types Of Option Trading Strategies<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/option-trading-course\/option-trading-strategies-contd\/\">Understand Option Trading Strategies<\/a><\/li><\/ul><\/div><\/div><div class=\"chapters_toggle\" title=\"chapters\"><a title=\"chapters\" href=\"#\" id=\"open_chapters\"><span>View Chapters<\/span>&nbsp;&nbsp;&nbsp;<i class=\"fa fa-chevron-right\"><\/i><\/a><a title=\"chapters\" href=\"#\" id=\"close_chapters\" style=\"display:none;\"><span>Hide Chapters<\/span>&nbsp;&nbsp;&nbsp;<i class=\"fa fa-chevron-right\"><\/i><\/a><\/div>\t<script>\n\t\tjQuery(document).ready(function(){\n\t\t\tjQuery('.chapters_toggle #open_chapters').click(function(e){\n\t\t\t\te.preventDefault();\n\t\t\t\tjQuery('.desktop_chapters').css(\"left\",\"0px\");\n\t\t\t\tjQuery('#open_chapters').css(\"display\",\"none\");\n\t\t\t\tjQuery('#close_chapters').css(\"display\",\"block\");\n\t\t\t\t\/\/jQuery('.chapters_toggle').css(\"width\",\"200px\");\n\t\t\t})\n\t\t\tjQuery('.chapters_toggle #close_chapters').click(function(e){\n\t\t\t\te.preventDefault();\n\t\t\t\tjQuery('.desktop_chapters').css(\"left\",\"-480px\");\n\t\t\t\tjQuery('#open_chapters').css(\"display\",\"block\");\n\t\t\t\tjQuery('#close_chapters').css(\"display\",\"none\");\n\t\t\t\t\/\/jQuery('.chapters_toggle').css(\"width\",\"100%\");\n\t\t\t})\n\t\t});\n\t<\/script>\n\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-93f371b tabs_contents\" data-id=\"93f371b\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-90f6d06 market_content_tabs elementor-widget elementor-widget-eael-adv-tabs\" data-id=\"90f6d06\" data-element_type=\"widget\" data-widget_type=\"eael-adv-tabs.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t        <div data-scroll-on-click=\"no\" data-scroll-speed=\"300\" id=\"eael-advance-tabs-90f6d06\" class=\"eael-advance-tabs eael-tabs-horizontal eael-tab-auto-active \" data-tabid=\"90f6d06\">\n            <div class=\"eael-tabs-nav\">\n                <ul class=\"eael-tab-inline-icon\" role=\"tablist\">\n                                            <li id=\"study\" class=\"active-default eael-tab-item-trigger eael-tab-nav-item\" aria-selected=\"true\" data-tab=\"1\" role=\"tab\" tabindex=\"0\" aria-controls=\"study-tab\" aria-expanded=\"false\">\n                            \n                                                                <i class=\"far fa-edit\"><\/i>                                                            \n                                                            <span class=\"eael-tab-title title-after-icon\" >Study<\/span>                            \n                                                    <\/li>\n                                            <li id=\"slides\" class=\" eael-tab-item-trigger eael-tab-nav-item\" aria-selected=\"false\" data-tab=\"2\" role=\"tab\" tabindex=\"-1\" aria-controls=\"slides-tab\" aria-expanded=\"false\">\n                            \n                                                                <i class=\"fas fa-book-open\"><\/i>                                                            \n                                                            <span class=\"eael-tab-title title-after-icon\" >Slides<\/span>                            \n                                                    <\/li>\n                                            <li id=\"videos\" class=\" eael-tab-item-trigger eael-tab-nav-item\" aria-selected=\"false\" data-tab=\"3\" role=\"tab\" tabindex=\"-1\" aria-controls=\"videos-tab\" aria-expanded=\"false\">\n                            \n                                                                <i class=\"far fa-eye\"><\/i>                                                            \n                                                            <span class=\"eael-tab-title title-after-icon\" >Videos<\/span>                            \n                                                    <\/li>\n                                    <\/ul>\n            <\/div>\n            \n            <div class=\"eael-tabs-content\">\n\t\t        \n                    <div id=\"study-tab\" class=\"clearfix eael-tab-content-item active-default\" data-title-link=\"study-tab\">\n\t\t\t\t        <p><div class='white' style='background:rgb(255, 255, 255); border:solid 0px rgb(255, 255, 255); border-radius:0px; padding:0px 0px 0px 1px;'>\n<div id='text_slider' class='owl-carousel sa_owl_theme owl-pagination-true' data-slider-id='text_slider' style='visibility: visible;visibility:visible;'>\n<div id='text_slider_slide01' class='sa_hover_container' data-hash='Introduction-to-Option' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:405px; '><h2 style=\"text-align: left\"><span style=\"color: #ff0000\"><strong>1.1 Introduction to options<\/strong><\/span><\/h2>\r\n<p><a href=\"http:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Data-points-amico.svg\"><img fetchpriority=\"high\" decoding=\"async\" class=\"size-full wp-image-17137 aligncenter\" role=\"img\" src=\"http:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Data-points-amico.svg\" alt=\"\" width=\"500\" height=\"500\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/\/2022\/01\/Data-points-amico.svg 150w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/\/2022\/01\/Data-points-amico.svg 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/\/2022\/01\/Data-points-amico.svg 1024w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/\/2022\/01\/Data-points-amico.svg 1536w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/\/2022\/01\/Data-points-amico.svg 2048w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/\/2022\/01\/Data-points-amico.svg 500w\" sizes=\"(max-width: 500px) 100vw, 500px\" \/><\/a><\/p>\r\n<p>A derivative is an asset whose value is derived from that of some other asset, known as the underlying. As an example, suppose you agree a contract with a dealer that gives you the option to buy a fixed quantity of gold at a fixed price of Rs.45000 at any time in the next three months. The gold is currently worth Rs.40000 in the spot market. (A spot market is where a commodity or financial asset is bought or sold for immediate delivery.) The option contract is a derivative and the underlying asset is gold. If the value of gold increases then so too does the value of the option, because it gives you the right (but not the obligation) to buy the metal at a fixed price. This can be seen by taking two extreme cases. <br \/>Suppose that soon after the option contract is agreed the spot value of the gold specified in the contract rises to Rs.50000. Alternatively, suppose the price collapses to Rs.35000<br \/>Spot Price Rises to Rs.50,000- If this happens you can exercise\u00a0 the option, buy the gold for Rs.45000 via the option and then sell the gold at a profit on the open market. The option has become rather valuable. Spot Price Falls to Rs.35000. It is much cheaper to buy the gold in the spot market than to acquire it by exercising the option. Your option is virtually worthless. It is unlikely that it will ever be worth exercising. As discussed in beginners module, because an option contract provides flexibility (it does not have to be exercised) an initial fee has to be paid to the dealer who writes or creates the option. This is called the option premium.<\/p><\/div>\n<div id='text_slider_slide02' class='sa_hover_container' data-hash='Definition-of-Options' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:405px; '><h3 style=\"text-align: left\"><strong><span style=\"color: #f1566d\">1.2 Definition of Options<\/span><\/strong><\/h3>\r\n<p><img decoding=\"async\" width=\"500\" height=\"500\" class=\"aligncenter wp-image-17138 size-full\" role=\"img\" src=\"http:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Presentation-rafiki.svg\" alt=\"\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/\/2022\/01\/Presentation-rafiki.svg 150w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/\/2022\/01\/Presentation-rafiki.svg 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/\/2022\/01\/Presentation-rafiki.svg 1024w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/\/2022\/01\/Presentation-rafiki.svg 1536w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/\/2022\/01\/Presentation-rafiki.svg 2048w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/\/2022\/01\/Presentation-rafiki.svg 500w\" sizes=\"(max-width: 500px) 100vw, 500px\" \/><\/p>\r\n<p>The buyer of a standard or &#8216;vanilla&#8217; financial option contract hasthe right but not the obligation:<\/p>\r\n<ul>\r\n<li>to buy (call option) or to sell (put option);<\/li>\r\n<li>an agreed amount of a specified financial asset, called the underlying;<\/li>\r\n<li>at a specified price, called the exercise or strike price;<\/li>\r\n<li>on or by a specified future date, called the expiry date.<\/li>\r\n<\/ul>\r\n<p>For this right the buyer of an option pays an up-front fee called the premium to the writer of the contract. This is the most money the buyer can ever lose on the deal. On the other hand the writer of an option can face virtually unlimited losses (unless a hedge is put in place). This is because it is the buyer who decides whether to exercise (take up) the option<br \/>Exchange-traded options are mainly standardized, but settlement is guaranteed by the clearing house associated with the exchange. Over-the-counter (OTC) option contracts are agreed directly between two parties, one of which is normally a bank or securities trading house. As a result the contracts can be customized to meet the needs of specific clients. However they cannot be freely traded and there is a potential default risk &#8211; the risk that the counterparty may fail to fulfil its obligations.<\/p>\r\n<p>&nbsp;<\/p><\/div>\n<div id='text_slider_slide03' class='sa_hover_container' data-hash='Types-of-Options' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:405px; '><h3 style=\"text-align: left\"><strong><span style=\"color: #f1566d\">1.3 Types of Options<\/span><\/strong><\/h3>\r\n<p><a href=\"http:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Site-Stats-pana-1.svg\"><img decoding=\"async\" class=\"size-full wp-image-17139 aligncenter\" role=\"img\" src=\"http:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Site-Stats-pana-1.svg\" alt=\"\" width=\"750\" height=\"500\" \/><\/a><\/p>\r\n<p>&nbsp;<\/p>\r\n<p>There are two main varieties of option contract.<\/p>\r\n<ul>\r\n<li>Call Option- The right but not the obligation to buy the underlying asset at the strike price.<\/li>\r\n<li>Put Option- The right but not the obligation to sell the underlying asset at the strike price.<\/li>\r\n<\/ul>\r\n<p>A so-called American-style option can be exercised on or before expiry. A European style option can only be exercised on the expiry date of the contract. In fact, these labels are historical and have nothing to do with where options are actually dealt. Most options traded on exchanges around the world are American-style. OTC options, regardless of where they are created, are often European-style. Because an American option confers additional rights, it is worth at least the same as the equivalent European contract.<\/p>\r\n<p>&nbsp;<\/p>\r\n<p>&nbsp;<\/p>\r\n<p>&nbsp;<\/p>\r\n<p>&nbsp;<\/p>\r\n<p>&nbsp;<\/p><\/div>\n<\/div>\n<\/div>\n<script type='text\/javascript'>\n\tjQuery(document).ready(function() {\n\t\tjQuery('#text_slider').owlCarousel({\n\t\t\titems : 1,\n\t\t\tsmartSpeed : 400,\n\t\t\tautoplay : false,\n\t\t\tautoplayHoverPause : false,\n\t\t\tsmartSpeed : 400,\n\t\t\tfluidSpeed : 400,\n\t\t\tautoplaySpeed : 400,\n\t\t\tnavSpeed : 400,\n\t\t\tdotsSpeed : 400,\n\t\t\tdotsEach : 1,\n\t\t\tloop : false,\n\t\t\tnav : true,\n\t\t\tnavText : ['Previous','Next'],\n\t\t\tdots : true,\n\t\t\tresponsiveRefreshRate : 200,\n\t\t\tslideBy : 1,\n\t\t\tmergeFit : true,\n\t\t\tautoHeight : true,\n\t\t\tmouseDrag : false,\n\t\t\ttouchDrag : true\n\t\t});\n\t\tjQuery('#text_slider').css('visibility', 'visible');\n\t\tvar owl_goto = jQuery('#text_slider');\n\t\tjQuery('.text_slider_goto1').click(function(event){\n\t\t\towl_goto.trigger('to.owl.carousel', 0);\n\t\t});\n\t\tjQuery('.text_slider_goto2').click(function(event){\n\t\t\towl_goto.trigger('to.owl.carousel', 1);\n\t\t});\n\t\tjQuery('.text_slider_goto3').click(function(event){\n\t\t\towl_goto.trigger('to.owl.carousel', 2);\n\t\t});\n\t\tvar resize_22250 = jQuery('.owl-carousel');\n\t\tresize_22250.on('initialized.owl.carousel', function(e) {\n\t\t\tif (typeof(Event) === 'function') {\n\t\t\t\twindow.dispatchEvent(new Event('resize'));\n\t\t\t} else {\n\t\t\t\tvar evt = window.document.createEvent('UIEvents');\n\t\t\t\tevt.initUIEvent('resize', true, false, window, 0);\n\t\t\t\twindow.dispatchEvent(evt);\n\t\t\t}\n\t\t});\n\t});\n<\/script>\n<\/p>                    <\/div>\n\t\t        \n                    <div id=\"slides-tab\" class=\"clearfix eael-tab-content-item \" data-title-link=\"slides-tab\">\n\t\t\t\t        <p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-11528 size-full\" src=\"http:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview.png\" alt=\"\" width=\"612\" height=\"408\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview.png 612w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview-300x200.png 300w\" sizes=\"(max-width: 612px) 100vw, 612px\" \/><\/p>                    <\/div>\n\t\t        \n                    <div id=\"videos-tab\" class=\"clearfix eael-tab-content-item \" data-title-link=\"videos-tab\">\n\t\t\t\t        <p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-11528 size-full\" src=\"http:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview.png\" alt=\"\" width=\"612\" height=\"408\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview.png 612w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview-300x200.png 300w\" sizes=\"(max-width: 612px) 100vw, 612px\" \/><\/p>                    <\/div>\n\t\t                    <\/div>\n        <\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>Study Slides Videos 1.1 Introduction to options \u00c2 A derivative is an asset whose value is derived from that of some other asset, known as the underlying. As an example, suppose you agree a contract with a dealer that gives you the option to buy a fixed quantity of gold at a fixed price of &#8230; <a title=\"What Are Options: Introduction, Definition &#038; Types\" class=\"read-more\" href=\"https:\/\/www.5paisa.com\/finschool\/course\/option-trading-course\/what-are-options\/\" aria-label=\"Read more about What Are Options: Introduction, Definition &#038; Types\">Read more<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"parent":22346,"menu_order":1,"comment_status":"closed","ping_status":"closed","template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[],"class_list":["post-22350","markets","type-markets","status-publish","format-standard","hentry"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/22350","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets"}],"about":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/types\/markets"}],"author":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/comments?post=22350"}],"version-history":[{"count":11,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/22350\/revisions"}],"predecessor-version":[{"id":75247,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/22350\/revisions\/75247"}],"up":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/22346"}],"wp:attachment":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/media?parent=22350"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/categories?post=22350"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}