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European Option

Definition of European Option

A European Option allows a trader to exercise the contract only on the day of expiry. For example, let’s say an options trader bought a European Call Option that expires on 01-01-2023.

The options trader can only exercise the call option, that is, buy the underlying assets on the day of expiry which is 01-01-2023. In India, traders can only engage in European options.

Related Terms

Best Efforts Underwriting/Offering

A best efforts underwriting or offering means the underwriter will do their best to market the securities for the issuer (company, supplier, etc) to investors. The underwriter will not buy all the securities from the issuer, only those the underwriter’s clients want to purchase.

Capital Gains Exemption

Capital gains exemption is the tax break that a government offers on profits earned by selling assets. Generally, an investor must pay a tax on the short-term capital gains or long-term capital gains earned.

But in certain cases, the government allows investors to offset taxes. For example, if an investor sells property and reinvests the entire amount back again into another property, they can avail of capital gains exemption.

Advance/Decline Line

An Advance/Decline Line can help you plot the daily difference between the number of advancing and declining stocks.

As a result, the Advance/Decline Line is a technical indicator used to gauge market sentiment, price trends, and trend reversals.

Here’s how the Advance/Decline Line is calculated:


  • Calculate the number of stocks that finished in the red.
  • Calculate the number of stocks that finished in the green.
  • Subtract #1 from #2 to find out the net movement aka Net Advance.
  • Repeat #1, #2, and #3 the next day and add the values for Net Advance.
  • Add both the previous day’s and the present day’s Net Advance. Repeat for future calculations.

Alpha

An Alpha indicates the measure by which a stock or portfolio has managed to outperform a benchmark like an index of shares.

A positive Alpha means that the security or portfolio is beating the market while a negative Alpha means that it is lagging.

Alpha can also be used to measure the competence of a fund manager and their strategies.

Capital Gains Tax

Capital gains are profits, which means they can be taxed. The rate of taxation is based on the type of asset (debt/equity) and holding period. Here is the list of ways capital gains are taxed in India:

Asset Type Gains Type Holding Period Tax Rate
Equity Short Term Capital Gains < 1 year 15%
Long Term Capital Gains > 1 year 10%
Debt Short Term Capital Gains < 3 years As per I-T slab
Long Term Capital Gains > 3 years 20%

Implied Volatility In Options

Implied volatility in options is a measure of the expected volatility of the underlying stock over the period of the options tenure. You could say that an option’s premium is related to the implied volatility - the change in the underlying share’s value over time affects the share price. In fact, the implied volatility rises when the options premium rises.



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