What are the options trading and how it works?
The option is part of the financial market. There are two types of options call options and put options. Call options are the right to own security at a certain price. The put option is the right to sell for security at a certain price.
A call seller of obligated to sell a security at a certain price and an output seller is obligated to purchase a security at a certain price.
If trader Rahul buys Reliance 30 call and trader Sonia is the seller of this option they now have a right and an obligation. Rahul would now be long 1 Reliance 30 call and has the right to buy a share of Reliance at 30. Trader Sonia as the seller of the Reliance 30 call would be short one of the options contracts and would have the obligation to sell the share of Reliance at 30 if the option is exercised.
If trader Rahul bought one Reliance 30 put and once again trader Sonia is the seller of this option, trader Rahul would now belong 1 Reliance 30 put as the holder of this put option. Trader Rahul now has the right to sell the share of Reliance at 30. Trader Sonia would now be short this one Reliance 30 put and would have the obligation to buy a share of Reliance at 30 if the option is exercised. Basically, the owner of an option holds all the cards at the have the choice of when and whether to exercise the option while the seller of the option takes on an obligation and has no control over the exercise of the option.
In at out of the money option
There are three-way to understand
In the money option
At the money option
Out of the money option
We will understand one by one
In the money means that an option has some sort of value if the option was it a suicide at that very e moment. If a trader owns a call option with a 30 strike price and the underlying security is trading at 35 this option would be referred 2 as being in the money. if a stock is trading higher than the strike of a call option that call option is in the money.
In the case of a put option, an equity put option is in the money when a stock is trading lower than a put option strike price. If a stock is trading at 25 the strike price of the put option is 30 the holder of this put option has the right to sell the stop at 30 while the stock is at 25 then there is the value of this option has the right to sell a stock at 30 when it is trading at 25 is immediately 5 of profit.
At the money
An option is at the money when the underlying security has the same price as the strike price of the option this holds true for both put and call option. So if a stock is trading at 30 both the 30 cal and 30 put would be at the money
Out of the money
Out of the money option is an option that has no value if exercised if our stock is trading at 35 and a trader holds the 40 calls there is no value in exercising the 40 cal and purchasing a share at 40 so there is a negative value by exercising this call option and this transaction would be automatic will be. five loss.
Intrinsic and time value
The price for an option is the label where buyers and seller have come together to trade the option
At times the values of an option is depicted by a bid and ask the big being a price that a trader is willing by of the option and ask being the price that another trader is the willing seller of the options. In either case, the value of the option is determined by the market. once this value has been determined the price of the option indicates how much time value and how much intrinsic value the market is giving to this option.
The value of an option is divided into two components the first is the intrinsic value which is the value of the option if it is exercised.as in the previous section this is also the amount of an option is in the money.if a call option with 8:30 strike is owned and the underlying security is trading at 35 the intrinsic value of this option would be 5 for 35 230 however it is very possible this call option would be trading at a level higher than 5.the trading price of this option that is greater than the intrinsic value is called the time value of the option.
Greeks
There are 5 Greeks delta Gamma theta Vega and Rho.
Delta is the most commonly e referred to Greek and probably the easiest to understand. The delta of an option indicates how much the price of an option should change in response to the $1 change in the underlying security. Since a call option benefits when the underlying raises in price The delta for the call is positive.similarly since of put option loses value when the underlying arises in price, The delta for a put option is negative.
Gamma is directly related to the delta. Major stop around The delta will move higher or lower. Gama indicates how much delta changes with a $1 change in the underlying security. Unlikely delta Gamma is positive for both call option and put option.this is a function of rage in the underlying forcing The delta of both calls higher and puts of a decrease in the underlying to post delta lower for both call and put option.when a put option delta is pushed higher it becomes less negative and when it goes lower it more negative therefore the sign of Gamma is always positive.
Theta relates to the effect that the passage of time will have on the value of an option.cheetah has a negative impact on both call and put option due to the passage of time decreasing the value of an option be it a call or put. the value of theta indicates how much value an option will lose from day to day or sometimes over on the number of days.in the case of theta the unit of change could be based on something other than one day.
Vega indicates how much the price of an option will increase or decrease with a 1% increase or 1% decrease in the implied volatility of the option works the same for both call option and put option with an increase in implied volatility hits the same for both call option and put option with an increase in implied volatility increases the value of the call or put option for a decrease in implied volatility has a negative impact on the value of calls and puts.
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