How is the Price of Options Trading Decided
An option is a legal contract between the buyer and the seller of the option. Option trading entails purchasing and selling securities at a predetermined price over a set period of time. This adaptability is a distinguishing aspect of options trading. Another unique feature of options trading is that you do not need to open a demat account to trade them. Although, for the sake of convenience, most traders choose to keep track of their portfolio in a demat account.
How insurance pricing helped in defining options pricing?
Options are similar to insurance in that you pay a set amount of money in exchange for the insurance company’s protection of your property. Based on their modes of operation, the difference between them is slight; options can be traded, whilst insurance policies cannot be transferred or traded. Call options and put options are the two forms of option contracts. When we expect the stock price to rise, we may buy call options, and when we expect the stock price to fall, we can buy put options. We can also sell call options at any time if we believe the price of the securities will fall sharply, and vice versa if we want to sell put options. Options are usually counted in units of contracts, with one contract equalling 100 unit options. A single unit option protects a single unit share. As a result, one contract covers 100 unit shares. Option pricing theory, in essence, gives a calculation of an option’s right value, which traders use in their tactics.
Learn more: Stock Trading Options
Before you begin online option trading, you must understand the most essential aspect that determines the value of the options. The strike price is used as the basis for trading.
In options trading, what is the strike price?
The strike price is the value that both buyers and sellers of the option to deal with agree on. That is, if the call option’s strike price is set at 35, the seller of the option must sell stock at that price to the buyer of the option, even if the stock’s market price is higher than 35 when the buyer exercises the option. The buyer of this option is free to purchase equities at a cheaper price than the market value.
The buyer will receive INR 4 if the current market price is 39. If the stock price is lower than the strike price, the buyer will strive to keep the option rather than letting it expire worthless.
Learn more: Stock Trading Fundamentals: Why Should You Start Trading Forex?
In a put option with a strike price, the option buyer is obligated to sell the stock at the strike price to the option seller. For example, if the put option strike price is INR 40, the seller of the option must buy the security from the buyer at this price if the option is exercised, even if the market price is lower. The option buyer will earn INR 5 if the market is 35. At first look, it appears that there are numerous transactions involved; nevertheless, the option seller will not purchase a security and then sell it to the buyer.
All transactions will be handled by the broker business, but the seller will be responsible for the additional funds used to purchase the asset. This indicates that if the seller loses five dollars, the buyer will gain five dollars.
Keep in mind that when the stock price meets the strike price, the option appears to have no value.
In options trading, this is how the options pricing is determined.
