The Language and Structure of Option Markets

The Language and Structure of Option Markets - 20-1An...

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Unformatted text preview: 20-1An option contract gives the holder the right-but not the obligation to buy or to sell an underlying security or commodity at a predetermined future date and at a predetermined price Option to buy is a call optionOption to sell is a put optionBuyer has the long positionin the contractSeller (writer) has the short positionin the contractThe Language and Structure of Option Markets20-2Option Contract TermsThe exercise price (X) is the price the call buyer will pay to-or the put buyer will receive from-the option seller if the option is exercisedThe option premium (C0,T)is the price that the option buyer must pay to the seller at Date 0 to acquire the option contractEuropean optionscan only be exercised only at maturity (Date T)American optionscan be exercised any time The Language and Structure of Option Markets20-3Option Valuation BasicsIntrinsic value represents the value that the buyer could extract from the option if he or she exercise the option immediately...
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The Language and Structure of Option Markets - 20-1An...

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