Importance of Share Trading: Explained

FUTURE OPTIONS 1
FUTURE OPTIONS

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Memorandum
Date 25/04/2019
To Board of directors
From Chief Accountant
Subject: importance of the share trading
Introduction
The purpose of this memorandum is to explain the requirements of share options taking
into consideration both the call and the put options.
Options are basically the financial instruments that are primarily used in the developed
countries and the major use of the options are to reduce the unnecessary risk prevailing in the
market. Options are the contracts through which the seller gives the right to the buyer, to buy or
sell the number of defined shares at the pre-determined rate. The right is transferred but the
obligation is not (Krause, 2019).
The basic feature of the option contract is its price or premium that sails with the market
place and it’s not fixed. Generally the long side of the contract pays this premium to the short
side of the contract in case the option contracts are first bought and sold (Dejanovski, 2014).
Further the options can be categorized on the basis of the methods they adapt to trade and on
the basis of the expiration cycle or the underlying security they relate to. The options are
classified as follows.
 Calls

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 Puts
 American style
 European style
 Exchange traded options
 Over the counter options
 Cash settled options
 Exotic options
Option Buyer’s Right Sellers Right Seller’s Obligations
Call options The basic right of the
buyer is to buy the
underlying stocks
form the seller a the
exercisable price on
or before the
stipulated time given
to him
The seller of the
option receives the
option premium paid
by the buyer.
However if the option
holder make sue of
the right, in such a
scenario the
The obligation of the
seller is to sell the
stocks underlying at
the strike price. The
selling needs to be
done before the
stipulated time and
the also on the basis
of the discretion of the
buyer (Henderson,
Peirson, Herbohn &
Howieson, 2015)
Put Options Under the put options
the buyers are
required to sell the
Once the options are
sold the right of seller
is confined to
Under the put options
the obligations of the
seller is to buy the