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Put and Calls

In: Business and Management

Submitted By meamiesje
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20.1 Option Basics
• Financial Option: A contract that gives its owner the right (but not the obligation) to purchase or sell an asset at a fixed price as some future date
• Call Option: A financial option that gives its owner the right to buy an asset
• Put Option: A financial option that gives its owner the right to sell an asset
• Option Writer: The seller of an option contract
• Exercising an Option: When a holder of an option enforces the agreement and buys or sells a share of stock at the agreed-upon price
• Strike Price (Exercise Price): The price at which an option holder buys or sells a share of stock when the option is exercised
• Expiration Date: The last date on which an option holder has the ri p g p ght to exercise the option
Ameri can Option: Options that allow their holders to exercise the option on any date up to, and including, the expiration date
• European Option: Options that allow their holders to exercise the option only on the expiration date Note: The names American and European have nothing to do with the location where the options are traded.
The option buyer (holder): Holds the right to exercise the option and has a long position in the contract
• The option seller (writer): Sells (or writes) the option and has a short position in the contract
• Because the long side has the option to exercise, the short side has an obligation to fulfill the contract if it is exercised. The buyer pays the writer a premium.
Stock options are traded on organized exchanges.
By convention, all traded options expire on the Saturday following the third Friday of the month.
• Open Interest: The total number of contracts of a particular option that have been written
• At-the-money: Describes an option whose exercise price is equal to the current stock price
• In-the-money: Describes an option whose value if immediately exercised would be…...

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