Call Option
An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period.
It may help you to remember that a call option gives you the right to "call in" (buy) an asset. You profit on a call when the underlying asset increases in price.
Put Option
An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buy shares.
A put becomes more valuable as the price of the underlying stock depreciates relative to the strike price. For example, if you have one Mar 08 XYZ 10 put, you have the right to sell 100 shares of XYZ at Rs 10 until March 2008 (usually the last thursday of the month). If shares of XYZ fall to Rs 5 and you exercise the option, you can purchase 100 shares of XYZ for Rs 5 in the market and sell the shares to the option's writer for Rs 10 each, which means you make Rs 500 (100 x (10-5)) on the put option. Note that the maximum amount of potential proft in this example ignores the premium paid to obtain the put option.
OPEN INTEREST
Definitions:
1. The total number of options and/or futures contracts that are not closed or delivered on a particular day.
2. The number of buy market orders before the stock market opens. (Cash Market)
A common misconception is that open interest is the same thing as volume of options and futures trades. This is not correct, as demonstrated in the following example:
-On January 1, A buys an option, which leaves an open interest and also creates trading volume of 1.
-On January 2, C and D create trading volume of 5 and there are also five more options left open.
-On January 3, A takes an offsetting position, open interest is reduced by 1 and trading volume is 1.
-On January 4, E simply replaces C and open interest does not change, trading volume increases by 5.
Short Covering
Purchasing securities in order to close an open short position. This is done by buying the same type and number of securities that were sold short. Most often, traders cover their shorts whenever they speculate that the securities will rise. In order to make a profit, a short seller must cover the shorts by purchasing the security below the original selling price.
Also referred to as "buy to cover" or "buyback".
For example, suppose a trader has sold short 50 shares of ABC stock at a price of Rs 10 per share because he speculated that ABC will not be successful in the near future. Unfortunately for the trader, the company has been very lucky recently and its price rises to Rs 15 per share. In order to limit his losses, this trader decides to cover his short position by buying back the 50 short sold shares at a price of Rs 15 per share.
