Sunday, August 29, 2010
options are financial instrument which offer the highest return on investment but require a lot of understanding to operate otherwise can cause huge loss to the investors. In technical term :
option is a contract between two parties
to buy/sell a certain asset
at certain specified price
at certain specified date
after paying a amount.
Asset becomes underlying in option technical terms. similarly
specified price = Strike price ,
specified date= Expiry date and
amount is called premium in option vocabulary.
For example Mr. Singh and Mr. Modi entered into a contract in which Mr. Singh agreed to buy 100 tones of wheat from Mr. Modi on 15 may at price of Rs.15000 per tones and paid an advance of 50000 for this booking.
Strike price is Rs.15000/tones
Underlying =100 tones of wheat
Expiry date is 15 may.
If Mr. Singh choose not to buy it from Mr. Modi ,he will loose his initial amount paid, such a situation can arise when the market price of wheat fall to say Rs.12000/tonne. In this situation Mr. Modi keeps the money in his pocket (this is the money paid to him as risk premium)
In the next article i will write more formally on options. keep visiting and do give your feedback about what you need which i can cover in my postings.
::: Be informed, Be cautious and most importantly, Be wise in trading