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Finance GlossaryEquity Options
Equity Options
Definition of Equity Options
An equity option gives the holder the right but not the obligation to buy or sell the underyling shares at a pre-agreed price and date. Equity options are derivative contracts that derive value from underlying shares.
Every equity option comes with a lot size that specifies the total number of underlying shares the contract contains. A trade who wants to start options trading can procure the derivative contract by paying a premium.
Every equity option comes with a lot size that specifies the total number of underlying shares the contract contains. A trade who wants to start options trading can procure the derivative contract by paying a premium.
Related Terms
Market-on-Close (MOC)
Market-on-Close (MOC) is an order to buy or sell a security at the market price as close as possible to the closing price of the trading session. It is commonly used by traders and investors who want execution at the day’s end, reflecting the final market sentiment.
Position Sizing
Position Sizing is a risk management technique for market participants to decide the number of units (shares, futures contracts, or option lots) of a specific security to buy or sell. The main objective is to restrict the potential amount of loss from any single trade to a small percentage of the overall trading capital (e.g., 1% or 2%). Traders use position sizing to ensure that even if a trade goes against them, the loss won't significantly damage their overall capital.
Return on Capital Employed (ROCE)
Return on Capital Employed is a parameter that shows how efficiently a company managed to use its overall capital to generate profits. The ROCE is obtained by dividing the operational profit by the capital used. A higher ROCE points to strong business efficiency and smart usage of capital. Therefore, it is a crucial metric that can evaluate the long-term performance of a company and the management of its quality.
Bombay Stock Exchange
Established in 1875, Bombay Stock Exchange or simply BSE is a place where stockbrokers and traders can buy and sell securities like stocks, bonds, ETFs, and more. 5000+ securities are listed on BSE, which is the oldest stock exchange in India and Asia.
Payback Period
The Payback Period is a capital budgeting metric that calculates the amount of time it takes for a project or investment to pay back its initial cost. It is one of the simplest methods for evaluating potential investments. The formula is: Payback Period = Initial Investment/Annual Cash Flow. A shorter payback period is usually preferred as it means a faster return of capital and less risk. However, it is a limited metric, as it does not take into account the time value of money and the cash flows generated after the initial investment is recovered.
Abc Wave Theory
Abc Wave Theory or Elliot Wave Theory is used to determine the direction of the stock market by identifying recurring waves or patterns over the long term. The theory is named after Ralph Nelson Elliott.
5 Motive or Impulse Waves are formed if the movement is in the direction of the trend. 3 Corrective Waves are formed if the movement is against the direction of the trend.
5 Motive or Impulse Waves are formed if the movement is in the direction of the trend. 3 Corrective Waves are formed if the movement is against the direction of the trend.
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