Understanding call option jargons

Having understood the call option structure let us delve into the terminology or jargon of Call options. Let us get familiar with Call option terminology which helps in comprehending the call option in detail at the micro level. These are the terminologies we are going to understand in detail.

Strike price

In all ‘Call’ options the strike price represents the price at which the stock can be bought on the expiry day. For example, if the buyer is willing to buy Reliance Call Option of Rs 2340 (2340 being the strike price) then it indicates that buyer is willing to pay a premium today to buy the rights of buying Reliance at Rs 2340 on expiry. He will buy Reliance at Rs 2340 only if Reliance is trading above rupees 2340. The table below is called an Option chain which lists the different strike prices available for a contract along with the premium price for the same.

The marked area in red shows the price of the underlying in the spot. Reliance is trading at rupees Rs 54.40 per share

♦The highlight in blue shows the different strike prices that are available. There are strike prices starting from Rs 1800 (with Rs 20 intervals) all the way up to Rs 2840.

♦One can enter into an Options agreement, at a specific strike price by paying the required premium

♦For example one can enter into a 2340 Call option by paying a premium of Rs 54.40 (highlighted in red)

Underlying price

A derivative contract derives its value from an underlying asset. The underlying price is the price at which the underlying asset trades in the spot market. For example Reliance was trading at Rs 2331 in the spot market. This is the underlying price. For a call option, the underlying price has to increase for the buyer of the call option to benefit.

Exercising of an option contract

Exercising of an option contract is the act of claiming your right to buy the options contract at the end of the expiry. The call option buyer will exercise his right only if the spot price is trading above 2331 on expiry.

Option expiry

For stocks the last Thursday of every month is the day on which the contract expires.

Option premium

Premium is the money required to be paid by the option buyer to the option seller/writer. Against the payment of premium, the option buyer buys the right to exercise his desire to buy (or sell in case of put options) the asset at the strike price upon expiry.

Option settlement

All options are cash settled.

The above understanding helps us to familiarize with Option concepts.

(The author is a homemaker, who dabbles in stock market investments in free time)