Options: Main Option contracts

Question 1

What are the characteristics of options on single stocks?

Answer 1

Option type: American
Settlement: Physical delivery
Premium payment: Upfront
Margin system: Stock style

Question 2

What are the characteristics of options on stock indexes?

Answer 2

Option type: mostly European
Settlement: Cash settlement
Premium payment: upfront
Margin system: stock style
Notes: Mature on the third Friday of the delivery month (same as the future)

Question 3

What are the characteristics of options on bond futures?

Answer 3

Option type: American, but priced as a European
Settlement: Physical delivery
Premium payment: At maturity
Margin system: Futures style
Notes: Mature 6 working days before the beginning of the delivery month (eg March futures options matures in February)

Question 4

What is a stock-style margin system?

Answer 4

• Stock-style margin system implies that the buyer pays the premium upfront (hence no variation margins are required to the buyer)…
• …while margins can be asked to the seller (whose losses are potentially unlimited)

Question 5

What is a futures-style margin system?

Answer 5

Since the premium is not paid upfront margins are applied to both the buyer and the seller

Question 6

What is the formula for put call parity?

Answer 6

C +PV(K) = P + S