OPTIONS
In finance, options are a type of derivative instrument. They are traded on exchanges as well as over the counter. They are linked to a variety of underliers including stocks, baskets of stocks, bonds, currencies, futures, swaps and commodities. While financial options come in many forms, there are two basic types: 1)A call option gives the holder the right to purchase a specified quantity of the underlier at a specified strike price by a specified expiration date. 2)A put option gives the holder the right to sell a specified quantity of the underlier at a specified strike price by a specified expiration date. For example, an issuer might sell a call option granting the holder the right to purchase 100 shares of a certain stock at $50 each by a specified expiration date. If, on the expiration date, the stock were trading at $47, the holder would not exercise the option because there would be no sense in paying $50 for a stock that is worth $47. If, on the other hand, the stock is trading at $54, the holder would exercise the option, purchasing 100 shares worth a total of $5,400 for just $5,000. Because the holder of such an option must pay the issuer a premium to purchase the option, he stands to lose that premium should the option expire worthless. However, that is all the purchaser stands to lose. His potential profit from purchasing the option is unlimited because there is (in theory) no limit to how much the underlying stock might appreciate during the life of the option.
The copyright of the article OPTIONS in Fixed Income & Bonds is owned by Naeem Akhtar. Permission to republish OPTIONS in print or online must be granted by the author in writing.
Go To Page: 1 Articles in this Topic Discussions in this Topic |