The Ultimate Options Trading Strategy Guide for Beginners by Roji Abraham

The Ultimate Options Trading Strategy Guide for Beginners by Roji Abraham

Chapter 1 : Understanding Stock Options
What are Stock Options?
You probably know what a stock/share of a company is - in the simplest of
terms, a single share represents a solitary unit of ownership of a company. 
Companies offer their shares for sale to raise capital for themselves and
such shares (also referred to as equities) are listed and traded in a stock
exchange.
In a stock exchange, many high profile shares that trade in huge volumes
may also have derivatives associated with them. A derivative is a contract
between two or more parties in which the contract ‘derives’ its value from
an underlying security such as a stock or an index.
The most commonly traded derivatives in the stock market are Futures and
Options. They are also commonly referred to as F&O.
Futures contracts are relatively easier to understand when compared to
options, but they carry more risk and are less flexible. Nevertheless,
discussing futures is beyond the scope of discussion in this book and our
focus will be strictly on options.
An option is defined as a type of contract, sold by one party to another that
gives the buyer of the option, the right, but not the obligation, to buy or to
sell the underlying stock at a pre-determined price. 
Options cannot exist indefinitely and every option has an expiry date. The
option buyer of a specific option may have a right to exercise his/her option
only at the time of expiry of the option, or he/she may have a right to
exercise the option at any point in time till the date of expiry (depending on
whether the option follows European or American convention – elaborated
a little later in this book).
Note: Derivatives can also be based on various other underlying securities
such as commodities. However, throughout this book, all examples and
scenarios are limited to options trading based on underlying stocks and
indices only.
Types of Options
There are fundamentally two different types of options. They are:
1. Call Options – These options give the buyer the right to buy the
underlying security at a fixed price.

The Ultimate Options Trading Strategy Guide for Beginners by Roji Abraham