c S
  is a financial instrument that gives the buyer the right, but not the obligation, to

purchase the underlying asset at a pre-specified price on or before a specified date

c S    is a financial instrument that gives the buyer the right, but not the obligation, to
sell the underlying asset at a pre-specified price on or before a specified date

c dhe purchaser of an option contract is buying the right to exercise the option against
the seller. dhe timing of the exercise privilege depends on the type of option:
S

  options can be exercised any time before expiration
   options may only be exercised during a short window before
expiration
An option that can only be exercised at the end of its life, at its maturity. European
options tend to sometimes trade at a discount to its comparable American option. dhis
is because American options allow investors more opportunities to exercise the
contract

 

 
 
 - this is the price at which the underlying security can be
bought or sold. dhe price specified in the options contract is known as the strike price
or the exercise price.

 !
  S  !
  option is an option that would lead
to a positive cashflow to the holder if it were exercised immediately. A call option on
the index is said to be in-the-money when the current index stands at a level higher
than the strike price (i.e. spot price > strike price). If the index is much higher than the
strike price, the call is said to be deep Id . In the case of a put, the put is Id if the
index is below the strike price.

S !
  An at-the-money (Ad ) option is an option that would lead to
zero cashflow if it were exercised immediately. An option on the index is at-the-
money when the current index equals the strike price (i.e. spot price = strike price).

  " !
  An out-of-the-money (Od ) option is an option that
would lead to a negative cashflow if it were exercised immediately. A call option on
the index is out-of-the-money when the current index stands at a level which is less
than the strike price (i.e. spot price < strike price). If the index is much lower than the
strike price, the call is said to be deep Od . In the case of a put, the put is Od if the
index is above the strike price.


#  "   dhe option premium can be broken down into two
components - intrinsic value and time value. dhe intrinsic value of a call is the amount
the option is Id , if it is Id . If the call is Od , its intrinsic value is zero. Putting it
another way, the intrinsic value of a call is ax[0, (St ² K)] which means the
intrinsic value of a call is the greater of 0 or (St ² K). Similarly, the intrinsic value of
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c dhe current price of the underlying security is the most important variable.
c ]or a call option, the higher the price of the underlying security, the higher the
value of the call.
c ]or a put option, the lower the price of the underlying security, the higher the
value of the put.

 


c dhe strike (exercise) price is fixed for the life of the option, but every
underlying security has several strikes for each expiration month
c ]or a call, the higher the strike price, the lower the value of the call.
c ]or a put, the higher the strike price, the higher the value of the put.
 
c  olatility is measured as the annualized standard deviation of the returns on
the underlying security.
c All options increase in value as volatility increases.
c dhis is due to the fact that options with higher volatility have a greater chance
of expiring in-the-money.

 

c dhe time to expiration is measured as the fraction of a year.
c As with volatility, longer times to expiration increase the value of all options.
c dhis is because there is a greater chance that the option will expire in-the-
money with a longer time to expiration.

" 
c dhe risk-free rate of interest is the least important of the variables.
c It is used to discount the strike price, but because the time to expiration is
usually less than 9 months (with the exception of LEAPs), and interest rates
are usually fairly low, the discount is small and has only a tiny effect on the
value of the option.
c dhe risk-free rate, when it increases, effectively decreases the strike price.
dherefore, when interest rates rise, call options increase in value and put
options decrease in value.

lack scholes formula:

  Nmd1 w
 w g Nmd 2