Options

Option
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price (the strike).[1] The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the corresponding obligation to fulfill the transaction. The price of an option derivesfrom the difference between the reference price and the value of the underlying asset (commonly a stock, a bond, a currency or a futures contract) plus a premium based on the time remaining until the expiration of the option. Other types of options exist, and options can in principle be created for any type of valuable asset.
An option which conveys the right to buy something at a specific price iscalled a call; an option which conveys the right to sell something at a specific price is called a put. The reference price at which the underlying asset may be traded is called the strike price or exercise price. The process of activating an option and thereby trading the underlying asset at the agreed-upon price is referred to as exercising it. Most options have an expiration date. If the optionis not exercised by the expiration date, it becomes void and worthless.
In return for assuming the obligation, called writing the option, the originator of the option collects a payment, the premium, from the buyer. The writer of an option must make good on delivering (or receiving) the underlying asset or its cash equivalent, if the option is exercised.
An option can usually be sold by itsoriginal buyer to another party. Many options are created in standardized form and traded on an anonymous options exchange among the general public, while other over-the-counter options are customized ad hoc to the desires of the buyer, usually by an investment bank.
Contract specifications

Every financial option is a contract between the two counterparties with the terms of the option specifiedin a term sheet. Option contracts may be quite complicated; however, at minimum, they usually contain the following specifications:
* whether the option holder has the right to buy (a call option) or the right to sell (a put option)
* the quantity and class of the underlying asset(s) (e.g., 100 shares of XYZ Co. B stock)
* the strike price, also known as the exercise price, which isthe price at which the underlying transaction will occur upon exercise
* the expiration date, or expiry, which is the last date the option can be exercised
* the settlement terms, for instance whether the writer must deliver the actual asset on exercise, or may simply tender the equivalent cash amount
* the terms by which the option is quoted in the market to convert the quoted priceinto the actual premium – the total amount paid by the holder to the writer
Options in debt instruments
Debt based instruments usually have the nature to guarantee the principal amount of the investor and hence come with lower investment risk in comparison to equity based instruments. Few years ago small investors used to invest most of their money in debt based instruments due to limitedavailability of other options, for example Deposit schemes (Bank Fixed deposits, Post office deposits, company deposits), debt mutual funds, saving schemes (PPF, NSC) and liquid funds etc. However, there has been a major shift in the personal finance sector during the last few years. Many innovative and hybrid investment instruments have been introduced in the market in personal finance space which hasmade this space more interesting and confusing.
Debt instruments
Debt instruments should be part of every investor's investment portfolio. Inclusion of debt based investment instruments provides stability to the portfolio and reduces the overall portfolio risk. However, the percentage allocation towards the equity versus the debt based instruments should depend upon the risk profile of the...