Option Market
Option Market
An Option market is a place where the rights to buy or sell stocks is traded, as per pre-established prices and exercise terms. For these rights, the holder of the stock pays a premium, and may exercise them within the expiration date or on the expiration date, or resell the stock in the market. In other words, it can be said that the option market is an order driven market, just like the equities market. Buy and sell orders are executed on the Derivatives Trading Platform or DTP.
The most common types of orders in the option market are the Market Order and Limit Order. Market Order is an instruction to buy or sell at the best possible price. A Limit Order is the instruction to buy or sell stock only at a specified price or better.
A Call Option gives its holder the right to buy the stock, at the exercise price, in accordance with the conditions decided upon. The writer of a Call Option sells the option on the trading floor and has the obligation to sell the stock upon receiving a communication stating that the position has been exercised. The person needs to hand over all the stock once payment has been made.
A Put Option gives its holder the right to sell the stock at the exercise price, in accordance with the conditions decided upon. The holder may, at any moment, trade his right to sell on the market, by carrying out an operation of an opposite nature. The writer, who sells a Put Option on the trading floor, has the obligation to buy the stock, if its position meets the needs of an exercise operation. In such a case, the person will pay the exercise price and receive the stock.
The price of an option is called its Premium. The Premium for which an option is bought or sold is determined by the agreement between the parties. The premium is paid by the holder and received by the writer of the option.
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