[Economy Q] Infy at 3000 premium 100 what does that mean?

[Economy Q] Infy at 3000 premium 100 what does that mean?

Rudranil Ghose asked,

 

what exactly does it mean when we say that in the stock market, a company is at (say) 3000, premium (say 100) ..For eg: Infy at 3000 premium 100

 

Answer

 

Infy at 3000 premium 100.

 

It means this is a call-options contract: Buy infy shares at 3000 Rs. on x date.

Right now you don't have to pay Rs.3000, but only that premium Rs.100 to that broker.

Suppose on that x date, price of infy share has gone down to 2000 Rs. you can cancel the contract, and loose only Rs.100/- (and may purchase those shares from another broker at 2000 Rs.)

 

But suppose on x date, the price of infy shares went upto 4000 Rs. then you'll exercise your option to buy it from that broker at 3000 Rs. and sell back to someone else at 4000 Rs. thus earning a profit of [4000-3000-100]=900 Rs.