Embedded Files
Options – Introduction
Options are a more complex financial instrument compared to Futures. Like Futures, Options are traded on exchanges, with three outstanding contracts available at any given time: Near Month, Next Month, and Far Month contracts. Similar to Futures, Options contracts also expire on the last Thursday of the month.
Read more ...
BUYERS AND SELLERS.
In the options market, there are both buyers and sellers of option contracts. Investors can buy or sell two main types of options: Calls and Puts. As we previously discussed in our introduction to derivatives, the buyer of an option is referred to as the 'holder', while the seller of an option is referred to as the 'writer'
As a holder of an option, you have the right, but not the obligation, to exercise it. You can choose to buy either a Call option or a Put option.
When you buy a Call option, you have the right to buy an underlying asset (stock) at a predetermined strike price within a specified period. You can exercise this right to buy on the expiry date if it's favorable to you.
Conversely, when you buy a Put option, you have the right to sell an underlying asset (stock) at a predetermined strike price within a specified period. You can exercise this right to sell on the expiry date if it's favorable to you.
If the market moves in your favor, you'll likely exercise your option to buy or sell. However, if the market moves against you, you can let your option lapse, and your loss will be limited to the premium you paid for the option.
You can go to our ‘Derivatives – Options’ for the examples.
If you are a Writer, you don’t have an Option …
As a writer of an option, you don't have the luxury of choice - you must fulfill the buyer's rights. When you sell a Call or Put option, you commit to selling or buying the underlying asset at the strike price if the buyer exercises their right.
As an option writer, you're bound by the contract to:
Sell the underlying asset at the strike price if the buyer exercises a Call option
Buy the underlying asset at the strike price if the buyer exercises a Put option
While the buyer has the flexibility to exercise their right or let it lapse, you, as the writer, are obligated to perform your side of the contract. This means that your potential losses are unlimited, while your gains are limited to the premium received. Therefore, selling options is a high-risk endeavor.
Page updated
Google Sites
Report abuse