OPTION It is a contract between the bank and its customers in which the customer has the right but not obligation to buy/sell a specified amount of underlying asset at fixed price within a specific period of time, but has no obligation to do so. In this contract, the customer has to pay specified amount upfront to the counterparty which is known as premium.
This is in contrast of the forward contract in which both parties have a binding contract.
The right to sell a security is called a 'Put Option', while the right to buy is called the 'Call Option'. Option Contract can be used to :
Making profit from changes in price of the underlying assets without investing in the same.
Option contract can also be used to safeguard from fluctuations in the price of underlying assets buying or selling the underlying assets at a pre-determined price for a specified period of time.
MTM gains and losses on options are adjusted against the available liquid margins. The net option value is computed using the closing price of the option and are applied the next day.
European Options - European options are options that can be exercised only on the expiration date. All index options traded at NSE are European Options.
In- the- money options (ITM) - An in-the-money option is an option that results in gain if it is exercised immediately.
At-the-money-option (ATM) - An at-the money option is an option that that results in no profit no loss situation if it is exercised immediately.
Out-of-the-money-option (OTM) - An out-of- the-money Option is an option that results in loss if it were exercised immediately.