All about stocks and index options
Options are different from forward and futures contracts. An option gives the holder of the option the right to do something. The holder does not have to exercise this right. Unlike, in a forward or futures contract, the two parties have committed themselves to doing something. Whereas it costs nothing (except margin requirements) to enter into a futures contract, but the purchase of an option requires an up-front payment called premium.
For the buyer of the Options the loss is limited to the amount of premium he has paid to buy the options. Where as the in futures contracts the holders of the contract is exposed to unlimited loss or profit.
Buyer of an option: The buyer of an option is the one who by paying the option premium buys the right but not the obligation to exercise his option on the seller/writer.
Writer of an option: The writer of a call/put option is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercises on him.
Call option: A call option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price.
Call options can be used if one has the bullish view underlying
Put option: A put option gives the holder the right but not the obligation to sell an asset by a certain date for a certain price.
Put options can be used if one has the Bearish view on the underlying
Option price/premium: Option price is the price which the option buyer pays to the option seller. It is also referred to as the option premium.