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 m e 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
hi ch gi ves t he hol der t he r i ght to
Opt i on w
buy shar es. A put becom es 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• Expiration Date: The day on which an option is no
longer valid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.