Sunday, 1 December 2019

Unit 8: Application of Options

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                                                        Unit 8: Application of Options    


The opportunity characteristic of options means that the losses for the buyer of an option are limited.

A call option gives the buyer the right to buy the underlying asset at the strike price specified in the option.

For selling the option, the writer of the option charges a premium.

The profits/loss that the buyer makes on the option depends on the spot price of the underlying.

A put option gives the buyer the right to sell the underlying asset at the strike price specified in the option.

For selling the option, the writer of the option charges a premium.

The profit/loss that the buyer makes on the option depends on the spot price of the underlying.

The options on futures are similar to options on individual stocks and options on stock indices except that holders acquire the right to buy or sell futures contracts on the underlying assets rather than the assets themselves.

An important way in which futures options differ from equity or index options is in respect of their expiration.

While in case of options on equity or stock indices a cash exchange occurs when an option is exercised, the same does not happen in case of futures option.

Instead, in a futures option, the holder acquires a long position (in case of a call) or short position (in case of a put) at a price equal to the exercise price of the option.

The principles of speculation using futures options are similar to those with other options.

Owners of stocks or equity portfolios often experience discomfort about the overall stock market movement.

Financial Derivatives.The options contracts, which are based on some index, are known as Index options contract.

An index in turn derives its value from the prices of securities that constitute the index and is created to represent the sentiments of the market as a whole or of a particular sector of the economy.

Arbitrage: Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference.

Call options: A call option gives the holder the right to buy a security.

Contract: A contract is an agreement between two or more people that is legally binding.

Derivatives: A security whose price is dependent upon or derived from one or more underlying assets.

Equity: Equity is the capital amount which is raised or contributed by the members of the company.

Hedging: A risk management strategy used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities.

Index Options: It is an option whose underlying security is an index.

Options: An option is a contract to buy or sell a specific financial product officially known as the option’s underlying instrument or underlying interest.

Payoff: An option gives the option holder the right/option, but no obligation, to buy or sell a security to the option writer/seller.

Put Option: A put option gives the holder the right to sell a security.

Speculation: Speculation in the stock market is when someone believes a stock or commodity is going to up, without basing that on any technical or fundamental analysis.

Strike Price: It is the specified price on an option contract at which the contract may be exercised, whereby a call option buyer can buy the underlie or a put option buyer can sell the underlie.

Trading Halt: It is a temporary suspension in the trading of a particular security on one or more exchanges, usually in anticipation of a news announcement or to correct an order imbalance.

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