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OPTIONS
So an option is a contract whereby
one party (the holder or buyer) has
the right but not the obligation to
exercise a feature of the contract on
or before the future date. But the
other party (seller or the writer) has
the obligation to honour specified
feature of the contract.
Terminologies of options
Call option: A right to buy the
underlying asset at the pre
determined price within specified
interval of time is called a CALL
option
Put option: A right to sell the
underlying asset at a pre determined
price within specified interval of time
is called a PUT option
Categories of option
European Option:Option that can be
exercised only at the time of maturity
is called European option
American option : Option that can be
exercised before the maturity is called
American option
Burmudan Option: An option that is
exercised with Over the counter (OTC)
is called as Burmudan option
Participants of options
Buyers of calls
Seller of calls
Buyer of puts
Seller of puts
Call option
Holder of an option exercises
theoption when price of the
underlying asset is more than the
strike price
S< X buyer lets the call expire
loss=Premium c
S=X Buyer is indifferent
loss =
premium c
S>X Buyer exercise the option Gain=
S-X-c
Put option
When
S<X Buyer exercises the option
Gain= X-S- P
S=X Buyer is indifferent
Loss=
premium p
S>x Buyer lets the contract price
Loss=pm p
Value of option = Max(0,X-s)-p
Money of option
At-the-money option
An at- the- money (ATM)option is an option
that would lead to a ZEROcash flow to the
holder if it were exercised immediately . A
call option on the index is said to be in AT
the money when the current index stands
equal to the strike price (Spot price =
strike price).In other words, an option
holder must poay to exercise the option, is
the same as current price of the underlying
security on which the option is written.
Underlying
value
(S)
S<X
S=X
S>X
Call Option
Out of-themoney
At-the-money
In-the-money
Pull option
In the money
At-the-money
Out-of-themoney
Options
Pay off(profit&loss)
linear
Non linear
Obligation to perform
Trading
Margin
None Forward
As required by
exchange in Futures
Initial payment
None