Types Working Terminologies Profits and payoffs Options
• An option is a derivative financial instrument
that specifies a contract between two parties for a future transaction on an asset at a reference price.
• The buyer of the option gains the right, but
not the obligation, to engage in that transaction, while the seller incurs the corresponding obligation to fulfill the transaction. Option Classifications
• Call Option : an option which gives a
right to buy the underlying asset at a strike price.
• Put Option : an option which gives a
right to sell the underlying asset at strike price. CALL AND PUT OPTIONS A cal l opt i on is a f i nanci al cont r act bet ween t wo par t i es, t he buyer and t he sel l er of t hi s t ype of opt i on. It is t he opt i on to buy shar es of st ock at a speci f i ed t i m e in t he f ut ur e. Of t en it is si m pl y l abel l ed a "cal l ". The buyer of t he opt i on has t he r i ght , but not t he obl i gat i on to buy an agr eed quant i t y of a par t i cul ar commodi t y The buyer pays a f ee (cal l ed a pr em ) f or t hi s r i ght . i um Put Opt i on is j ust opposi t e of t he Cal l hi ch gi ves t he hol der t he r i ght to Opt i on w buy shar es. A put becom es mor e val uabl e as t he pr i ce of t he under l yi ng st ock depr eci at es r el at i ve to t he st r i ke pr i ce. Some Terminologies • Call Option: Right but not the obligation to buy • Put Option: Right but not the obligation to sell • Option Price: The amount per share that an option buyer pays to the seller • Expiration Date: The day on which an option is no longer valid • Strike Price: The reference price at which the underlying may be traded • Long Position: Buyer of an option assumes long position • Short Position: Seller of an option assumes short position Call Option Buying A Call option buyer basically is bullish about the underlying stock. Put Option buying
• A buyer of put option is bearish on
underlying stock. • Both the Call and Put option buyers are buying the rights, that is they are transferring their risks to the sellers of the option. • For this transfer of risk to the sellers, buyers have to compensate by paying Option Premium. • Option premium is also known as Price of the option, Cost or Value of the option. Option Styles
• European option – an option that may only
be exercised on expiration.
• American option – an option that may be
exercised on any trading day on or before expiry.
• Bermudan option – an option that may be
exercised only on specified dates on or before expiration.