**Question: How does the margin system work in option trading?**

**Answer:**Since the risk of the buyer of an option is limited to the premium paid, there is no margin required from the buyer of the option. The buyer’s cost is limited to the premium paid. The risk of the option seller is unlimited and therefore he needs to pay the margin as prescribed by the exchange at the time of entering into an option contract. To reduce the default risk, the option position of the seller is marked to market every day.

**Question: If I have two opposite positions in futures and options, then do I have to pay margin on both the positions?**

**Answer:**You have to pay margin on your positions but the net margin required is lower than the margin on two separate positions. Suppose you have sold one futures contract on ACC at Rs152 and simultaneously bought an ACC call option with a strike price of Rs160 at Rs5. In this portfolio one position is bullish and the other bearish, so in case ACC’S price goes up, one position would gain and the other would lose. Similarly if ACC’S price goes down, one position would gain while the other would lose. These are hedging positions. Hence the margin is less.

**Question: How are options different from futures?**

**Answer**: In case of futures, both the buyer and the seller are under obligation to fulfill the contract. They have unlimited potential to gain if the price of the underlying moves in their favour. On the contrary, they are subject to unlimited risk of losing if the price of the underlying moves against their views.

**Question: How are options different from futures in terms of price behaviour?**

**Answer**: Trading in futures is one-dimensional as the price of futures depends upon the price of the underlying only. Trading in option is two-dimensional as the price of an option depends upon both the price and the volatility of the underlying.

**Question: I want to know all about the behaviour of the price of an option?**

**Answer:**You need to understand and appreciate various option Greeks like delta, gamma, theta, vega and rho to completely comprehend the behaviour of option prices.

**Question: What is delta of an option and what is its significance?**

**Answer:**For a given price of underlying, risk-free interest rate, strike price, time to maturity and volatility, the delta of an option is a theoretical number. If any of the above factors changes, the value of delta also changes.

**Question: What is theta of an option and its significance?**

**Answer:**The theta of an option is an extremely significant theoretical number for an option trader. Like the other Greek terms you can calculate theta using option calculator.

**Question: What is vega of an option and its significance?**

**Answer:**Vega is also a theoretical number that can be calculated using an option calculator for a given set of values of underlying price, time to expiry, strike price, volatility and interest rate etc. Vega indicates how much the option premium would change for a unit change in annual volatility of the underlying.

**Question: What is gamma of an option and its significance?**

**Answer:**Gamma is a sophisticated concept. You need patience to understand it as it is important too. Like delta, the gamma of an option is a theoretical number. Feeding the price of underlying, risk-free interest rate, strike price, time to maturity and volatility, you can compute value of gamma using the option calculator. The gamma of an option tells you how much the delta of an option would increase or decrease for a unit change in the price of the underlying.