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This document provides an overview of options, including the different types of options, how they work, key terminology, and profits/payoffs. It discusses that an option is a contract that gives the buyer the right but not obligation to conduct a future transaction on an asset at a reference price. It defines call and put options, with calls giving the right to buy and puts the right to sell. Key terms discussed include strike price, expiration date, long/short positions, and premiums. It also covers the different option styles of European, American, and Bermudan options.
This document provides an overview of options, including the different types of options, how they work, key terminology, and profits/payoffs. It discusses that an option is a contract that gives the buyer the right but not obligation to conduct a future transaction on an asset at a reference price. It defines call and put options, with calls giving the right to buy and puts the right to sell. Key terms discussed include strike price, expiration date, long/short positions, and premiums. It also covers the different option styles of European, American, and Bermudan options.
This document provides an overview of options, including the different types of options, how they work, key terminology, and profits/payoffs. It discusses that an option is a contract that gives the buyer the right but not obligation to conduct a future transaction on an asset at a reference price. It defines call and put options, with calls giving the right to buy and puts the right to sell. Key terms discussed include strike price, expiration date, long/short positions, and premiums. It also covers the different option styles of European, American, and Bermudan options.
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 em 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 Opt i on whi ch gi ves t he hol der t he r i ght to buy shar es. A put becomes 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. “THANK YOU” Name- Ragini verma Class- MBA IV Section- Marketing & Finance