Underlying

Introduction to Underlying Assets

When you first start looking into options, you may hear the term ‘underlying’ or ‘underlying security.’ This may seem complicated, but the concept is quite simple. Think of an underlying security in options trading like the foundation of a building.

When you decide to build a house, the first thing you need is a strong foundation. This foundation serves as the base upon which the entire structure of the house is built. Similarly, in options trading, the underlying security is like this foundation.

Just as a house can be built on various types of foundations (concrete, steel, etc.), options can be based on different types of underlying securities such as indices, stocks, or commodities. Each underlying security provides the fundamental support for the options contracts, just as the foundation supports the structure of a building.

So when you're trading options, the underlying security is the essential asset upon which the options contract is built, much like how a house relies on its foundation for stability and structure.

What is an underlying?

Underlying refers to the financial asset on which a derivative contract is based. In the context of trading and investing, it is the specific security, index, commodity, or currency that serves as the foundation for derivative products such as options, futures, and swaps. The value and performance of these derivative contracts are derived from the movements and characteristics of the underlying asset.

For example, in the case of stock options, the underlying asset would be the individual stock on which the option contract is based. Similarly, in the case of futures contracts, the underlying asset could be a commodity like gold or crude oil, or even a financial index like the Nifty 50 or the Sensex.

Understanding the underlying asset is crucial for traders and investors, as it directly impacts the value and risk associated with derivative contracts. By analyzing the underlying asset's price movements, market trends, and fundamental factors, traders can make informed decisions about their derivative positions.

What underlying securities have options on them?

Both the NSE and BSE offer options that have the underlying securities as either an index or stock. These are the indices with options available on them:

These are the stocks with options available on them for each exchange:

For updated information on available optionable securities:

• NSE optionable securities list
• BSE optionable securities list