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Learn More About Futures And Options

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What are derivatives?

A contract which derives its value from the prices, or index of prices, of underlying securities.

What is a futures contract?

A futures contract is a legally binding agreement to buy or sell the underlying security in the future.

What is type of option?

Type of option means the classification of an option as either a ‘Put’ or a ‘Call’.

What is exercise style?

Exercise style of an option refers to the price at which and/or time as to when the option is exercisable by the holder. It may either be an American style option or an European style option or such other exercise style of option as the relevant authority (stock exchange) may prescribe from time to time.

What is a European style option contract?

European style option contract is an option contract which may be exercised on the expiration day on or before the expiration time.

What is an American style option contract?

American Style option contract is an option contract which may be exercised any day before the expiration day or before the expiration time.

What is an option contract?

Option contract is a type of derivatives contract which gives the buyer/holder of the contract the right (but not the obligation) to buy/sell the underlying security at a predetermined price within or at end of a specified period.

The option contract which gives a right to buy is called a “call” option and the option contract that gives a right to sell is called a “put” option.

Who is an option holder?

Option holder is a person who has bought an option contract.

Who is an option seller?

Option seller is a person who has sold an option contract.

Who is an option writer?

Option writer is a trading member who is permitted by the F&O segment of the exchange to write option contracts.

What is “in the money” strike price?

In the case of a put option, it is the strike price of the option contract which is above “at the money” or “near the money” strike price.

In the case of a call option, it is the strike price of the option contract which is below “at the money” or “near the money” strike price.

What are “at the money” or “near the money” strike price?

It is the strike price of the option contract at or within such range of the underlying as may be specified by the relevant authority (stock exchange) from time to time.

What is “out of the money” strike price?

In the case of a put option, it is the strike price of the option contract which is below “at the money” or “near the money” strike price.

In the case of a call option, it is the strike price of the option contract which is above “at the money” or “near the money” strike price.

What is a premium?

Premium is the price which the buyer of the option pays to the seller of the option for the rights conveyed by the option contract.

What is a long position?

Long position in a derivatives contract means outstanding purchase obligations in respect of a permitted derivatives contract at any point of time.

What is a short position?

Short position in a derivatives contract means outstanding sell obligations in respect of a permitted derivatives contract at any point of time.

What is open interest?

It is the total number of derivatives contracts of an underlying security that have not yet been offset and closed by an opposite derivatives transaction nor fulfilled by delivery of the cash or underlying security or option exercise.

For calculation of open interest, only one side of the derivatives contract is counted.

What is strike price interval?

It is the gap between any two successive strike prices which the relevant authority may prescribe from time to time.

What is a contract month?

It is the month in which a contract needs to be finally settled, as decided by the stock exchange.

What is contract value?

It is the value arrived at by multiplying the strike price of the options contract with the regular/market lot size.

What is a settlement date?

It is the date on which the settlement of outstanding obligations are required to be settled.

What is the settlement price?

It is the closing price of the underlying on the day of exercise or such other price as may be decided by the relevant authority (stock exchange) from time to time.

What is regular lot/market lot size?

It is the number of units that can be bought or sold in a specified derivatives contract.

What is last trading day/expiry day?

It is the day up to and on which a derivatives contract is available for trading.

It is normally the last Thursday of the month. If the last Thursday is a holiday, the expiry will happen on Wednesday.

The definitions have been sourced from the National Stock Exchange of India.

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