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
SEBI Registration Nos.: INB011109437 (BSE -EQ) / INB231109431 (NSE-EQ) /INF231109431 (NSE -FO) / INF011109437 (BSE -FO)/ INE231109431 (NSE-CD) |NSE Member Trading Code: 11094 | BSE Clearing Number: 393 | AMFI Reg No. ARN -13549, PFRDA Reg. No - POP 04102015, IRDA Corporate Agent Licence No.-HDF2806925/HDF C000222657, Research Analyst Reg. No. INH000002475, CIN-U67120MH2000PLC152193. Registered Address: I Think Techno Campus, Building B, Alpha, Office Floor 8, Near Kanjurmarg Station, Kanjurmarg (East), Mumbai -400 042. Tel -022 30753400 Compliance Officer: Ms. Binkle R Oza. Ph: 022-30453600 Email: [email protected].
Disclaimer : HDFC securities Ltd is a financial services intermediary and is engaged as a distributor of financial products & services like Corporate FDs & Bonds, Insurance, MF, NPS, Real Estate services, Loans, NCDs & IPOs in strategic distribution partnerships. Customers need to check products & features before investing since the contours of the product rates may change from time to time. HDFC securities Ltd is not liable for any loss or damage of any kind arising out of investments in these products. Investments in Equity, Currency, Futures& Options are subject to market risk. Clients should read the Risk Disclosure. Document issued by SEBI & relevant exchanges & the T&C on www.hdfcsec.com before investing. Equity SIP is not an approved product of Exchange and any dispute related to this will not be dealt at Exchange platform.