Friday, 29 November 2019

Unit 5: Introduction to Options

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                                                Unit 5: Introduction to Options   




An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date.

An option, just like a stock or bond, is a security.

There are two basic types of options – call options and put options.

There are three main categories of options: European, American and Bermudan.

There are four types of participants in options markets namely, Buyers of calls, Sellers of calls, Buyers of puts and Sellers of puts.

The Options Clearing Corporation is the sole issuer of all options listed at the Chicago Board of Options Exchange (CBOE) and other U.S. options exchanges.

In India, NSE has an associated clearing house attached to it for futures and options trading.

Some of the important terms used in option trading are: Option Class, Option price, Strike Price, Expiration date and others.

There are three positions in an option – In-the-money; At-the-money; and Out-of-themoney.

The option premium can be broken down into two components – intrinsic value and time value.

Index derivatives are derivative contracts which derive their value from an underlying index.

The two most popular index derivatives are index futures and index options.

Index derivatives are a powerful tool for risk management for anyone who has portfolios composed of positions in equity.

American Options: American options are options that can be exercised at any time up to the expiration date.

Most exchange-traded options are American.

At-the-money option: An at-the-money (ATM) option is an option that would lead to zero cash flow if it were exercised immediately.

Call option: A call option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price.

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