Options and their characteristics, Option (finance)

Option (finance)

American vs. European Underlying Asset Option is a derivative securitya contract giving the owner buyer of the option the right but not the obligation to buy or sell a defined quantity of a defined asset.

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This asset is called underlying asset or underlying security or just underlying. The use and popularity of options has been expanding rapidly in the last decades and there is a wide range of underlying assets for which options exist today. Perhaps the best known underlyings are single stocks shares in companies traded in the stock market.

You can also trade options on options and their characteristics, bonds, interest rates, currencies, ETFs, and many other kinds of assets or economic variables. Call Cption vs.

Put Option There are two basic types of options, call options and put options. A call option gives its owner a right to buy the underlying asset, while a put option gives its owner a right to sell the underlying asset.

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For one underlying and one type of options calls or puts there are usually at least several different strike prices available. For example for a stock which currently trades at 57 you can trade call options with strike prices of 50, 55, 60, 65 etc.

The strike price may be set by reference to the spot price market price of the underlying security or commodity on the day an option is taken out, or it may be fixed at a discount or at a premium. The seller has the corresponding obligation to fulfill the transaction i. An option that conveys to the owner the right to buy at a specific price is referred to as a call ; an option that conveys the right of options and their characteristics owner to sell at a specific price is referred to as a put. The seller may grant an option to a buyer as part of another transaction, such as a share issue or as part of an employee incentive scheme, otherwise a buyer would pay a premium to the seller for the option. A call option would normally be exercised only when the strike price is below the market value of the underlying asset, while a put option would normally be exercised only when the strike price is above the market value.

Expiration Date Options have limited life. Every option has a defined expiration date that is also fixed during its whole life and nothing can change or move it.

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If an option is not exercised before or on its expiration dateit becomes worthless it expires after that date. An American option can be exercised during its whole life, this means from the moment you buy it till the moment it expires its expiration date.

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On the contrary, a European option can be exercised only at one single moment — the moment it is expiring. This has nothing to do with the trading in both types of options.

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You can buy or sell American, as well as European options, any time during their life when the options exchange is open if the option is exchange traded. Remember that these terms are not related to geography in any way. Both types of options trade in many places in the world.

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What All Have in Common There is one important thing all these five characteristics of every option have in common: they are all fixed. None of them can under any circumstances change for that single option during its whole life. When you are buying an option, options and their characteristics know its underlying asset, whether it is a call or put, its strike price, expiration date, and whether it is an American or a European option. You can be sure these characteristics will stay as they are for the whole time you will be holding the option.

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