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Options Trading Terms

Basic Option Terms​

Understanding basic option jargons is essential for anyone entering the world of options trading. Here are key terms every AlgoTest user should know when building strategies or simulating trades.

1. Strike Price​

The strike price is the predetermined price at which the buyer can exercise the right to buy (in the case of a call) or sell (in the case of a put) the underlying asset.
Example: If you buy an Infosys call option with a strike price of ₹2,500, you can purchase the stock at ₹2,500 upon expiry if the market price is higher.

2. Underlying Price​

This is the current price of the asset in the spot market.
Example: If Infosys is trading at ₹2,400, that’s the underlying price. The relationship between the underlying price and strike price determines the value of an option.

3. Exercising an Option​

This refers to the action of using your right to buy or sell the asset at the strike price before the expiry date. For a call option, you’d exercise it when the underlying price exceeds the strike price.
In Indian markets, exercising usually happens at expiry.

4. Expiry​

Options contracts have a fixed expiration date, usually on the last Thursday of the month in India. After this date, the contract is settled, and any value is realized.
You can choose between current, mid-month, or far-month expiry contracts, depending on your trading horizon.

5. Premium​

The premium is the price you pay for the option. It is determined by various factors, including the time left to expiry, volatility, and the difference between the underlying and strike price.
Example: If you buy an Infosys call option with a premium of ₹100, this is the cost of having the right to buy Infosys at the strike price.

6. Settlement​

In India, options are cash-settled. If you exercise a call option, instead of physically receiving the shares, you get the cash equivalent of the difference between the strike price and the underlying price at expiry.
Example:
Suppose you buy a TCS call option with a strike price of ₹3,000 at a premium of ₹100. On the expiry day, TCS is trading at ₹3,100. You exercise the option, earning ₹100 per share (₹3,100 – ₹3,000), minus the premium paid.

  • Net profit: ₹0 (₹100 – ₹100).
    If TCS had traded at ₹3,200, your profit would be ₹100 per share.

Conclusion​

These jargons form the backbone of options trading. AlgoTest users can leverage the Strategy Builder and Simulator to experiment with these concepts, improving their understanding of market dynamics before engaging in live trades.