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    Derivatives Options

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    saidutt sharma
    An options contract gives the buyer the right, but not the obligation, to buy or sell an asset at a predetermined price on or before a specified date. This differs from futures contracts which obligate the parties to conduct the transaction. Options can be used to speculate on price changes or hedge against risk. A put option provides downside protection by allowing the sale of an asset at the strike price, while a call option allows profiting from upside price movements by purchasing the asset at the strike price. Option buyers and sellers take on different levels of risk depending on whether the option expires worthless or is exercised.

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    Derivatives Options

    Uploaded by

    saidutt sharma
    48 views2 pages
    An options contract gives the buyer the right, but not the obligation, to buy or sell an asset at a predetermined price on or before a specified date. This differs from futures contracts which obligate the parties to conduct the transaction. Options can be used to speculate on price changes or hedge against risk. A put option provides downside protection by allowing the sale of an asset at the strike price, while a call option allows profiting from upside price movements by purchasing the asset at the strike price. Option buyers and sellers take on different levels of risk depending on whether the option expires worthless or is exercised.

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    An options contract gives the buyer the right, but not the obligation, to buy or sell an asset at a predetermined price on or before a specified date. This differs from futures contracts which obligate the parties to conduct the transaction. Options can be used to speculate on price changes or hedge against risk. A put option provides downside protection by allowing the sale of an asset at the strike price, while a call option allows profiting from upside price movements by purchasing the asset at the strike price. Option buyers and sellers take on different levels of risk depending on whether the option expires worthless or is exercised.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    48 views2 pages

    Derivatives Options

    Uploaded by

    saidutt sharma
    An options contract gives the buyer the right, but not the obligation, to buy or sell an asset at a predetermined price on or before a specified date. This differs from futures contracts which obligate the parties to conduct the transaction. Options can be used to speculate on price changes or hedge against risk. A put option provides downside protection by allowing the sale of an asset at the strike price, while a call option allows profiting from upside price movements by purchasing the asset at the strike price. Option buyers and sellers take on different levels of risk depending on whether the option expires worthless or is exercised.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    1.3.

    5 Options 

    An options contract is similar to a futures contract in that it is an agreement between two


    parties to buy or sell an asset at a predetermined future date for a specific price. The key
    difference between options and futures is that, with an option, the buyer is not obliged to
    exercise their agreement to buy or sell. It is an opportunity only, not an obligation—futures
    are obligations. As with futures, options may be used to hedge or speculate on the price of the
    underlying asset. 

    Imagine an investor owns 100 shares of a stock worth $50 per share they believe the stock's
    value will rise in the future. However, this investor is concerned about potential risks and
    decides to hedge their position with 
    An option. The investor could buy a put option that gives them the right to sell 100 shares of
    the underlying stock for $50 per share—known as the strike price—until a specific day in the
    future—known as the expiration date. 

    Assume that the stock falls in value to $40 per share by expiration and the put option buyer
    decides to exercise their option and sell the stock for the original strike price of $50 per share. If
    the put option cost the investor $200 to purchase, then they have only lost the cost of the option
    because the strike price was equal to the price of the stock when they originally bought the put.
    A strategy like this is called a protective put because it hedges the stock's downside risk. 

    Alternatively, assume an investor does not own the stock that is currently worth $50 per share.
    However, they believe that the stock will rise in value over the next month. This investor could
    buy a call option that gives them the right to buy the stock for $50 before or at expiration.
    Assume that this call option cost $200 and the stock rose to $60 before expiration. The
    call buyer can now exercise their option and buy a stock worth $60 per share for the $50 strike
    price, which is 
    An initial profit of $10 per share. A call option represents 100 shares, so the real profit is
    $1,000 less the cost of the option—the premium—and any brokerage commission fees. 

    In both examples, the put and call option sellers are obligated to fulfill their side of the contract
    if the call or put option buyer chooses to exercise the contract.  However, if a stock's price is
    above the strike price at expiration, the put will be worthless and the seller— the option writer—
    gets to keep the premium as the option expires. If the stock's price is below the strike price at
    expiration, the call will be worthless and the call seller will keep the premium. Some options can
    be exercised before expiration. These are known as American-style options, but their use and
    early exercise are rare. 

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