What are the special features of Options?

3. What are the special features of Options?

From Mcx 

• Options give right to buyer, but no obligation, to buy or

sell the underlying.

• They allow one to ‘lock in’ a future buy or sell price for

an underlying.

• Options can be exchange-traded or Over-the-Counter (OTC)

ING OPTIONS

Assume Mr. Matthew wishes to buy a commodity from Mr. Abdul after a month, but wants to lock in the price today.

After negotiation, Mr. Matthew enters into an ‘option’ agreement with Mr. Abdul that gives him a right to buy the commodity for Rs.10 lakh after end of one month.

To execute this option, Mr. Matthew pays Mr. Abdul a nominal amount say, Rs.10,000. After a month, either of the two situations may arise:

1. The price of the commodity goes up

As ruling prices are higher, Matthew prefers to exercise his ‘option’ of buying the commodity at the agreed price of Rs.10 lakh with Abdul.

2. The price of the commodity goes down

It is advantageous for Mr. Matthew to buy the commodity outside the agreement since prices have fallen and thus, he would let the ‘option’ agreement go unexercised and buy the commodity from outside. In this scenario, the maximum loss to Matthew would be Rs.10,000, which he had paid to Mr.  Abdul for entering into the ‘option’ agreement.

Note: Mr. Matthew has the right but not the obligation to buy from Mr. Abdul. Mr. Abdul, on the other hand, is obligated to sell to Mr. Matthew, if he exercises his option.

1. Commodity Options Do you know?

2. What can be underlying for Options?

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