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An option can be said to be a contract between a buyer and a seller, where a buyer pays the premium to the seller for the right to buy (call option) or to sell (put option) an asset at a predetermined future date (expiry date) at a specific price (strike price). This can be done on the internet using online trading India. Different Types of Options Payoffs Payoff on a Long Asset: When an investor is bullish, buys a particular stock, and holds it for a term period, he is said to be LONG on the asset. As the price moves, the profit/loss also moves in a linear correlation. Payoff on a Short Sell Asset: When an investor is bearish and short sells the asset in futures (since cash short selling is not allowed), he is said to be SHORT on the asset in online trading India. As the price moves the profit & loss also moves in a linear correlation. Payoff on a Buy of Call Option: When an investor is bullish on a particular asset but has a low/medium risk appetite, he buys a call option and holds it until expiry. The price in the north direction has a direct correlation whereas in the southward direction has a correlation till the premium paid price and then flattens up, thus creating a non-linear behavior; this is unlike the previously mentioned behavior of a buy/sell on an asset directly. Thus, the gain would be maximum with a minimum/fixed loss. Payoff on a Buy of Put Option: When an investor is bearish on a particular asset but has a low/medium risk appetite, he buys a put option and holds it until expiry. The price in the southward direction has a direct correlation whereas in the north has a correlation till the premium paid price and then flattens up thus creating a non-linear behavior unlike BUY/SELL on a asset directly. Thus, the gain would be maximum with a minimum/fixed loss. Payoff on a Short Sell Call Option: Here the investor has a bearish view but rather than paying the premium, he would be more interested in receiving the premium. Thus, he would enter into a short sell trade. Here the investor who short sells takes the complete risk in the trade, as gains would be limited with possible huge losses if the price moves in the opposite direction. Thus, the payoff would be exactly opposite to that of a call option buy. Payoff on a Short Sell Put Option: The only difference between the Short SELLS of CALL & PUT option would be the view of the investor, which is Bullish. The Payoff would be exactly opposite to that of a PUT Option buy. The options can be a great tool for a low / medium risk investor giving an opportunity for high gains possibly in the online trading India by the transfer of risk from buyer of an option to the seller. About Author: Mitchell Clarke is a trading analyst, empowering individual investors to make better investment decisions. He provides industry's best finance decisions on unlimited trading, zero brokerage services on equity, online trading India and currency derivatives (futures and options). For more information on online share trading, you can also visit www.rksv.in.
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