Financial Options Flashcards
Definition Financial Options
Contract that gives the owner the right to buy or sell an asset at a predetermined price up to a certain future date
Definition Strike Price
Also Exercise Price,
The Price at which an option is exercised
Expiration date
last date on which the option can be exercised
conventionally the saturday after the 3rd friday of the month
Definition Option Buyer
Also option holder
Holds the right to exercise
–> Long Position
Definition Option Seller
Also option writer
Sells the option, and has the obligation to fullfill the contract if exercised
–> Short Position
Why is the Option Seller willing to do this?
Option Premium
How many basic options are there?
2.
Call Option: rigth to buy an asset
Put Option: right to sell an asset
Two most common contracts?
American Options: Right to exercise the option on any date up to and including the expiration date (more common)
European Options: Right to exercise the option only on the expiration date
Definition Open Interest
Total Number of contracts of a particular option that have been written
Exercise price = current stock price
At-the-Money
Option whose value if immediately exercised would be positive
In-the-money
opposite: out of the money
Extreme differences between stock and exercised price: deep-out/in…
Motives to use options?
Hedge: reducing risk by holding contracts or securities whose payoffs are negatively correlated with some risk exposure
Speculate: When investors use contracts or securities to place a bet on the direction in which they believe the market is likely to move (–> options are way smaller investments than the stock itself)
Value of a call option at expiration date (long postition)
value of the option C = max(Stock Price at Expiration S - Exercise Price K, 0)
Value of a put option at expiration date (long position)
Value of option P = max( Exercise Price K - Stock Price at Expiration S, 0)
Value of put/call options at expiration date (short position)
sellers cash flow is the negative of the buyers cash flow
