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The call seller has the obligation to sell the asset to the buyer at the fixed price. What is an option? Options are of two types, calls and puts. A call option gives the buyer the right to buy the asset underlying the option at a fixed price on a predetermined date, while a put confers the right to sell the asset similarly.
The call seller has the obligation to sell the asset to the buyer at the fixed price and the put seller has the obligation to buy the asset from the put buyer at the set price on a particular date. Not necessary, though commodities like gold are deliverable on the MCX platform if you choose to keep your position open when the tender period begins. But you have the choice to square off the position to pocket gain or cut losses. Say gold futures for delivery on December 5 today cost Rs 30 lakh a kilo 1 contract and say the option on that contract is quoting at Rs 30, You feel the price will rise so you buy the option by paying Rs 30, If the underlying contract jumps to Rs 31 lakh a week later the option rises to Rs 31, You can square off the contract and make a gross return of Rs 1, on investment of Rs 30,, which is 3.
The call seller loses Rs 1, If the price goes down you lose and the call seller gains. So you sell the gold option at Rs 30, and it falls to Rs 29,, you make a profit of Rs 1, in a week, which a put seller will have to pay you on the exchange platform. If however the price Increases to Rs 31, the put seller gains and you lose. Unlike futures contracts which are marked to market daily, resulting in a debit or credit for as long as you settle the trade, in options there is no daily mark to market.
The cost is lesser than taking a futures contract , returns are relatively higher and maximum loss is limited to the premium or price of option, unlike in futures where returns are high and losses can be unlimited.. In the above instance max loss is Rs However, options are subject to time decay daily, meaning each day the option is held and underlier hardly moves, the option holder sees an erosion in its value.
In comparison futures are not subject to time decay. Read more on Tender period. Watching for a turn toward hawkish. Aadhaar linking deadlines for these 6 services. One year on, code at work at unusual pace. My Saved Articles Sign in Sign up. Find this comment offensive? This will alert our moderators to take action Name Reason for reporting: Foul language Slanderous Inciting hatred against a certain community Others. Your Reason has been Reported to the admin. Fill in your details: Will be displayed Will not be displayed Will be displayed.More...