Option Trading A-Z.docx - Options fall under the category...

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Options fall under the category of derivative instruments. Tounderstand the inherent nature of options, it is important tounderstand what derivatives are.Financial instruments that derive their value from an underlyingasset are commonly known as derivatives. For example, an optionbeing a derivative, the price of an option will depend on anotherunderlying asset. Options may have stocks, commodities, currencies,or any other security as their underlying.An option contract gives the investor a right to participate in a trade.An option contract is not an obligation in that the option may or maynot be exercised. Options contracts give the option buyer the right toeither buy or sell an asset at a pre-specified price at or before theexpiration date of the contract.The right that the option provides comes at a premium, which is thecost paid upfront at the time of purchasing the derivative. In anoption contract, the two parties involved are the option buyer (alsoknown as an ‘option holder’) and the option seller (also known as an‘option writer’).Options strategies, if designed carefully, can ideally suit anyinvestment portfolio.Options provide the following benefits:Income generation, through earning a premium for optionwritingHedging the risk in the portfolio by limiting the downsidepotentialSpeculation about price direction of the underlying assetBasic option concepts1. What is a call option?
2. What is a put option?
option gives the option buyer a right, but no obligation, to sell anunderlying asset at a pre-specified price within the expiration date.Put options limit the downside risk of the portfolio by providing asupport level to the assets in the portfolio.3. What is the strike price?
4. What is the expiration date?
5. What is the option premium?

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Term
Spring
Professor
N/A
Tags
Options, Writer, OTM

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