options_handout

options_handout - OPTIONS Options are called derivatives....

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
OPTIONS Options are called derivatives . This is because they derive their value from the underlying security. You can have options on stock, stock indexes, commodities, etc. In this course we will be focusing on stock options. Options provide the holder with the right (but not the obligation) to buy or sell an asset: (i) at a predetermined price (strike or exercise price) (ii) for a specified period of time (ie. before the expiration date). For this privilege, the holder ( buyer ) of the option pays the writer ( seller ) of the option a certain price (the option premium). A standard option contract is written for 100 shares , but option prices are quoted per share . The buyer of the option contract has purchased the option and has a long position, or holds the contract long. The seller or writer of an option has a short position. Investors create or write options. There are primarily 2 types of options; call and put. All others are a combination of these 2 options. Call option : provides the holder with the right but not the obligation, to buy the underlying asset at a set price. The writer (seller) of the call option must sell if the holder exercises the option. Put option : provides the holder with the right, but not the obligation, to sell the underlying asset at a set price. The writer (seller) of the put option must buy the asset if the holder of the option exercises the put option. Exercising an option : the act of buying or selling the underlying asset via an option contract (between the holder and the writer). The use of options results in a “zero sum game” . The gain experienced by one of the investors will be exactly offset by the loss experienced by the other investor of the contract. The above is true if we ignore brokerage fees. If the brokerage fees are considered, than the only party who always wins is the brokers because they make money through commission each time someone buys or sells an option contract. Exercise (strike) price:
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/07/2012 for the course FIN 3361 taught by Professor Mishra during the Spring '11 term at Dalhousie.

Page1 / 3

options_handout - OPTIONS Options are called derivatives....

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online