Table of Contents
Segments in Stock Market :
- Equity Market or Spot Market
- Derivatives or F&O are divided into 2 parts..
-
- Futures
- Options (Call and Put). The contracts are created by Option Writer.
In this article, we are looking into the happening of trades in the Options segment/Options market.
Options Trading :
It is trading in 2 types of Options.
- Call Option : Right to Buy
- Put Option : Right to Sell
When the person buys an Option, it means someone sells the same. Either it is Call or a Put Option.
Option Writer :
The person who is selling an Option is called an Option Writer / Option Seller. In the market, the contracts are always equal numbers. i.e. number of options sold/writes = number of options purchase/buyers.
Unless the seller sells the option contract, the buyer can’t buy the same. It means it is a mechanism of Selling first and then Buying Later. Also called Shorting of a contract first and then covering up the position.
In simple terms, the person who sells/shorts any option first without having the same in hand is called an Option Writer or Options Seller. And he buys the same back later to cover his position or can let the option gets exercised.
The whole trade is based on the opposite thinking person namely Bullish and Bearish. Explained below
Call Option Writer :
The Option Writer who thinks or predicts that The prices of a Particular Share (Current ₹ 100/-) will go down, He sells Call Option at a higher rate (e.g. @₹ 10 per share) and buy it back at a lower rate. In this way, he creates a Call option contract in the market. (Here the seller/writer is having a Bearish view on that particular Stock).
The person, who thinks that the stock price will go up, buys this Call Option (e.g. @₹ 10 per share). (Here the buyer is having a bullish view).
If the Stock/Share price goes down (Rs. 80/-) then obviously the Call Option price will also go down and will get lost more if the contract is nearing expiry (e.g. ₹ 6 per share). In this case, the Call Option Writer gets the profit (10-6=4 per share) by buying it back (@ ₹ 6/-). If the price goes up, Call Option Buyer gets the profit.
Put Option Writer :
The Option Writer who thinks or predicts that The prices of a Particular Share (Current ₹ 150/-) will go up, He sells Put Option at a higher rate (e.g. @₹ 15 per share) and buy it back at a lower rate. In this way, he creates a Put option contract in the market. (Here the seller/writer is having a Bullish view on that particular Stock).
The person, who thinks that the stock price will go down, buys this Put Option (e.g. @₹ 15 per share). (Here the buyer is having a bearish view).
If the Stock/Share price goes up (Rs. 200/-) then obviously the Put Option price will go down and will get lost more if the contract is nearing expiry (e.g. ₹ 9 per share). In this case, the Put Option Writer gets the profit (15-9=6 per share) by buying it back ( @ ₹9/-). And if the price goes down, the Put Option Buyer gets the profit.
OptionTrades :
Primary trades in the Options Market :
In simple terms, the trades take place by Shorting or selling first and covering or buying later. These are all primary trades wherein the option contracts get created by Option Writers.
Secondary trades in Options Market :
Once the Options contracts are created by Option Writers, these get traded in the market. The person who buys the Options and sells them later are the contracts of Options that are available in the market at the various strike prices. In the secondary market, new options will not get created, but the existing options are traded.
Strike Price :
The Options (Call and Put) are traded at various prices depending upon the prevalent Spot price in the market. These various prices for which the contracts get created are called Strike prices.
E.g. : Spot price of a share in the market is ₹ 100/, the Call and Put options will get created for below prices called Strike Price.
the Call options are created for ₹ 105/-, ₹ 110/-, ₹ 115/-….. and
the Put Options are created for ₹ 95/-, ₹90/-, $ 85/-…..
