Meet Neha. She has 500 shares of LMS Ltd. priced at Rs. 120 per share currently. 

Meet Rishabh. His research indicates that the shares of LMS Ltd. could go up to Rs. 200 in the next month.

He makes Neha an offer to buy all her shares at Rs. 160 anytime between today and the next 30 days.

Neha agrees, based on Rishabh paying her 20% of the deal value upfront – also called OPTION PRICE, that is Price paid for reserving an Option. The Option ends once Rishabh exercises his right to buy her shares, or once the 30 days are up.Until then, Neha cannot sell her shares.

Rishabh has basically purchased the RIGHT to purchase Neha’s shares for 30 days. BUT he is under no OBLIGATION to do so. – That’s why it is called an OPTION.

In short, An Option is a contract allowing the recipient, the right but not the obligation, to conduct a specified transaction (either buy or sell) of a specified asset, at a specified price, in a specified time-frame.

Now let’s say the shares of LMS Ltd. go up to Rs. 175.  Rishabh can now exercise his Option and buy Neha’s shares But If the price had fallen, let’s say to Rs. 90, Rishabh could have simply forfeited his Option money and not carried out the deal.

Like all derivatives, Options allow investors to leverage their capital to maximise their returns.

Talk to our advisors to know how you can use derivatives to an advantage.

Know More to Grow More

Investment in securities market are subject to market risks, read all the related documents carefully before investing

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