There are two types of derivatives instruments traded on Exchanges; namely Futures
and Options: Futures: A futures contract is an agreement between two parties to
buy or sell an asset at a certain time in the future at a certain price.
Options: An Option is a contract which gives the right, but not an obligation, to
buy or sell the underlying at a stated date and at a stated price. While a buyer
of an option pays the premium and buys the right to exercise his option, the writer
of an option is the one who receives
the option premium and therefore obliged to sell/buy the asset if the buyer exercises
it on him. Options are of two types - Calls and Puts options:
“Calls” give the buyer the right but not the obligation to buy a given quantity
of the underlying asset, at a given price on or before a given future date.
“Puts” give the buyer the right, but not the obligation to sell a given quantity
of underlying asset at a given price on or before a given future date. All the options
contracts are settled in cash.
Further the Options are classified based on type of exercise. At present the Exercise
style can be European or American.
American Option - American options are options contracts that can be exercised at
any time upto the expiration date. Options on individual securities available at
NSE are American type of options.
European Options - European options are options that can be exercised only on the
expiration date. All index options traded at NSE are European Options.