Option Trades - Exchange and OTC world

Option Trades , one of the highly traded product in Exchange as well OTC world . Which is riskier, which type of position requires more margin and what is the difference between profit and pay off ?

I will not get into details into exchange vs OTC, except for the fact options in exchange has less or no credit risk. Basically, Option contract give the right to the Buyer but not obligation to Buy or Sell the underlying security which can be any thing, stocks, bonds, indexes , commodity, etc

For eg: I believe company Company A shs price will increase in next 3 months but I am not sure on my analysis and also I cant afford risk of loss of money If I am wrong due to less financial backup. Current price is $90. My rich friend thinks it will go down definitely and is sure on his analysis . I can enter into naked option, that is either Buy a Call option or Sell a Put Options for Strike of $100 with him. Whoever becomes the Seller of Option, he will get some premium as compensation for the unlimited risk he is taking.

Buyer of the Call option gets the right to buy underlying shs and Buyer of the Put gets the right to Sell the underlying shs . Whoever is the Seller has to obligate and agree to what Buyer wants to do.

If I become a Option buyer , I will get the the right to buy shs if it goes at $100 if price rises above , but if it goes down , I will lose only premium as I can buy from the market at lower price instead of paying $100 to my friend.

If I become Put Seller ,which mean I am giving my friend the right to Sell the shs to me at $100. Though I will a earn premium at the start but if the price goes down below $100, I will be obligated to buy shs at $100 which is available at a lesser price in the market, that is a disadvantage to me and advantage to my friend. But, If the price goes up, my profit would be the premium.

So considering my risk appetite and analysis, I enter Buy Call, Strike @100, underlyer: Company A shs. Seller of an option has more risk , so obviously more margin needs to kept aside by my friend to cover losses, if any. As a buyer, I can only lose premium, that's it.

Remember, If you want the right on the underlyer, enter a Buyer of Call/Put. Here you will have to pay premium and start the trade as a Loss

If you want be obligated , then enter as a Seller of Call/Put. Here you will receive premium and start the trade as a Profit.

Entering as a Buyer/ Seller or Call/Put Option differs based on risk appetite and analysis. Settlement can be Cash or actual delivery of shs.

Always rem, Payoff of an option is the difference between Spot Price and Strike Price, it doesn't contain premium amounts. Profit and Loss is considered by taking premium amounts into consideration.

Alot of option trades in the market are not held till maturity. Traders always closes the trade before Maturity and profit is based on what premium paid and received on its closure and vice versa

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