Discover How to Create Option Choice in a Contract with DocHub

Aug 6th, 2022
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How to How to Create Option Choice in a Contract

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An option contract grants the right but not the obligation to buy or sell an asset at an agreed price by a certain date. Call options allow buying at a set price, while put options allow selling at a set price. Options offer flexibility in trading prices, unlike futures contracts. They come at a cost called a premium, providing protection against price declines while allowing for potential gains.

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For example, suppose you purchase a call option for stock at a strike price of Rs 200 and the expiration date is in two months. If within that period, the stock price rises to Rs 240, you can still buy the stock at Rs 200 due to the call option and then sell it to make a profit of Rs 240-200 = Rs 40.
Although there are many types of options in the stock market, there are broadly two types of options namely, Call and Put.
Example of an Options Contract Company ABCs shares trade at $60, and a call writer is looking to sell calls at $65 with a one-month expiration. If the share price stays below $65 and the options expire, the call writer keeps the shares and can collect another premium by writing calls again.
For example, assume that Nifty Bank Call option premium is ₹120 for a strike price of 38,000. A trader selling a call option will receive ₹3,000 (₹120*25 the lot size) from the buyer. Say at the time of expiry, the Nifty Bank moves up to 38,500 and the premium moves up to ₹500.
You can never tell when you will be assigned. Once you sell an American-style option (put or call), you have the potential for assignment to fulfill your obligation to receive (and pay for) or deliver (and are paid for) shares of stock on any business day.
While an option seller will always have some level of uncertainty, being assigned may be a somewhat predictable event. Only about 7% of options positions are typically exercised, but that does not imply that investors can expect to be assigned on only 7% of their short positions.
There are four basic options positions: buying a call option, selling a call option, buying a put option, and selling a put option. With call options, the buyer is betting that the market price of an underlying asset will exceed a predetermined price, called the strike price, while the seller is betting it wont.
Its automatic, for the most part. If an option is ITM by as little as $0.01 at expiration, it will automatically be exercised for the buyer and assigned to a seller. However, theres something called a Do Not Exercise request that a long option holder can submit if they want to abandon an option.
A put option is a contract that gives its holder the right to sell a number of equity shares at the strike price, before the options expiry. If an investor owns shares of a stock and owns a put option, the option is exercised when the stock price falls below the strike price.
Option approval level 4 involves the sale of short calls and short puts, which are options sold on margin where the potential settlement cost is unlimited.

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