An Introduction to Proprietary Trading

Proprietary trading is a term used in the context of a bank or other financial institution wherein the bank or financial institution engages in trading stocks, futures, options, commodities, currencies & other derivative instruments with its own money & on its own account.

Traditionally banks & other financial institutions are engaged in accepting deposits from clients & lending the same at a higher rate to earn an income equivalent to interest rate differentials. Also Investment banks have played a major role in fund raising for its clients. Investment Banks also play a big role in helping their clients to find the buyers for stock issues. Banks have been acting as a guarantor many times for buying the shares of their clients in case the stock issue is under subscribed. Many banks also provide portfolio management services & trading facilities to their client. While providing all these services the bank or other financial institution is engaging in trading on behalf of their clients for which usually it charges fees or commission to the clients.

Option Trading: An Overview

Trading Option means buying or selling Options over the exchanges. Option trading is designed for sophisticated investors. Traders use the option trading for speculation as well as hedging.
 

The main advantage of trading option is the leverage offered by the options trading. A trader can invest in Options with very less investment instead of investing in the underlying security.

What is Option Exercise?

The purpose of this article is to throw some light on the financial logic behind the Option trading & investors’ decision to exercise or to allow the option to expire. We would discuss the logic taking an example of Equity or Stock Option in which the underlying instrument of the Option is an equity share.

Option exercise means the buyer of the option chooses to buy or sell the underlying instrument of the option contract depending upon the nature of option, either Call or Put respectively.

Introduction to Options

The purpose of this article is to introduce our readers with the basic concepts of Options. People having a good knowledge of options may find this article a simplified version but that is my main motive of writing this article. I would cover the intermediary & advanced option concepts in my coming articles. I have covered the basic structure of the Option contracts in this article to achieve ease of understanding.

What is an Option?

An Option is a derivative instrument or a financial product under the terms of which you have an option to buy or sell a particular security or other financial instrument as specified in the Option contract. This security or other financial instrument is called as “Underlying Instrument” of the Option on which the Option is based.