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What is lot size, expiry date, strike price, and premium?
When trading options, you'll encounter several key terms. Here's a simple breakdown:
Lot Size
- What it is: Options are traded in groups of shares called a 'lot.' The lot size tells you how many shares are in one options contract.
- Example: If a stock's option has a lot size of 1,000, one contract represents 1,000 shares. For NIFTY Index options, one lot usually means 25 shares.
- Why it matters: You can only trade options in multiples of their lot size.
Expiry Date
- What it is: This is the last day an options contract is valid. After this date, the contract is no longer active.
- Example: If an option expires on the last Thursday of a month, you must decide what to do with it by that date.
- Why it matters: It's the deadline for your option contract.
Strike Price
- What it is: The strike price is the set price at which you can buy or sell the underlying asset if you exercise the option.
- Example:
- For a Call Option: If you buy a Call Option with a strike price of ₹100, you can buy the stock at ₹100 per share, even if the market price is higher.
- For a Put Option: If you buy a Put Option with a strike price of ₹100, you can sell the stock at ₹100 per share, even if the market price is lower.
- Why it matters: It determines if your option is 'in the money' (profitable) or 'out of the money'.
Premium
- What it is: The premium is the cost to buy an options contract. It's the price for acquiring the right to buy or sell at the strike price.
- Example: If the premium is ₹5 and the lot size is 100, the total cost for one contract is ₹5 x 100 = ₹500.
- Why it matters: This is the maximum you can lose if the option expires worthless. For the seller, it's the income received for selling the option.
Understanding these terms is crucial for anyone starting with options trading.