What is option?
Option is a financial contact which grant it’s holder the right but not obligation to buy or sell specified number of financial securities or foreign currencies at predetermined price within specified time period. There is two type of options: call and put option. Call option is in favor of buyer whereas put option is in favor of seller. Option, as a derivative security, is traded in the derivative markets. The value of option is depends upon the market price of underlying assets (securities or commodities or currencies). Value of call option positively increases with increase in market price of underlying assets whereas value of put option decrease with increase in the market price of underlying assets.
Call Option
Call option is a financial contract to sell and buy underlying assets which is in favor of buyer. It means that the buyer has right but not obligation to buy specified amount of financial securities or foreign currency at predetermined price in particular time period but the seller has obligation to sell if the buyer wants. In this contract the buyer has right to buy whereas the seller has obligation to sell if buyer wants. The buyer only purchase the security or an asset specified in the contract if the price (exercise price) set in the contract is lower than the market price. If the market price of respective underlying asset is lower than the contract price then the buyer reject the deal and may buy from the markets if wants. The value of call option is depends upon the market price of underlying assets. Higher the market price in respect to the exercise price (price mentioned in the option contract), higher will be the value of call option and vice versa. For example, a call option is made to buy 100 shares of ABC company at $100 after one year from today. During the option period the stock price may up and down.
Put Option
I think you might know about the option which is the contract between buyer and seller to buy or sell specified amount of assets at particular price within specified time. If the contract is made in favor of the seller then it is termed as put option. In put option, the option holder (Seller of an asset or a security) has right but not an obligation to sell the security whereas the buyer has obligation to buy if s/he wants. Here, the seller has greater freedom so s/he sell the stock or assets only when the contract price is higher than the market price. If the price specified in the contract is lower than that of market price then s/he will sell elsewhere in the market by terminating the contract. The value of put option is decreases with increase in market price and vice versa. For example, a put option is made to sell 100 shares of ABC company at $100 after one year from today. During the option period the stock price may up and down.