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Options are derivatives of an underlying financial instrument like stocks, commodities, and currencies. A good analogy is the curd which is a derivative of milk. So, just like increase or decrease in the price of milk increases or decreases the price of curd, similarly, movements in prices of the underlying instrument affect the price of options.
Options are traded in exchanges MSE, MCX etc., like stocks and commodities. Every option contract mentions its strike price, premium, lot size and expiry date.
Like any other business transaction, options trading includes buyers and sellers. The buyers of options have rights or a choice and sellers have obligations. The buyers have the choice to exercise his right to buy/sell option before expiry or else opt out and allow the option to expire.
Options are of two types: calls and puts. A Call option gives you the right to buy the option whereas a Put option gives you the right to sell the option.
There is no delivery of options. All transactions are settled in cash.
When the current price of a Call Option stands is higher than the strike price it is said to be In-The-Money (ITM). For a Put Option, when the current price is lower than the strike price then it is said to be In-The-Money (ITM).
When the current price of option equals to the strike price, then the option is said to be At-The-Money.
When the current price of a Call Option stands is lower than the strike price it is said to be in Out- of-The-Money (OTM). For a Put Option, when the current price is higher than the strike price then it is said to be Out-of-The-Money (OTM).
Open interest (OI) and volume measure the activity or interest of traders in a particular option. It is also used by traders to ascertain liquidity in an option. Options with low volume and open interest will have low buyers or sellers and hence low liquidity.
Volume- It is the total number of contracts traded between buyers and sellers in the options market. It is calculated on daily basis. For example, say a buyer buys 10 lots of an option and a seller sells 10 lots of options. So the volume for that day will be 10.
Open Interest- It is the total number of contracts that are held by traders. It excludes exercised and expired contracts. For example, say 3 traders are holding 10 lots of contract. So the open interest for that day would be 30.
Here’s how to find out the volume and OI of an option?
You can know the volume and Open Interest of the desired Option by reading its options chain. Go to www.nseindia.com and search for the desired Option in the search bar available at home page. On the specific options page, click on the options chain.
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