What is option trading?

1. Options are a type of derivative security as their price is essentially linked to the price of the underlying asset.

2. The buyer of an option has the right to receive delivery or payment of an underlying on a specific date, at a specific price, on a future date. He is however not under obligation to exercise the option.

3. The seller of an option is obliged to make delivery or payment of an underlying on a specific date, at a specific price, on a future date if the buyer exercises the option.


4. Since the buyer may or may not exercise the option, the seller collects a small upfront payment, called the option premium, when he sells the option.

5. The right to buy is called a call option and the right to sell is a put option.

The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.