Options

GSU, Department of Finance, AFM
Spring 2014

- Chapters 10-11 / page 1 -

Introduction to Derivative Markets
FI 4200/AFM

Characteristics of Options r Definitions and Positions:
- A Call Option gives its owner for a specified time the right to purchase an underlying good at a specified price (= exercise price or strike price)

- A Put Option gives its owner for a specified time the right to sell an underlying good at a specified price (= exercise/strike price)

- An American Option permits the owner to exercise (=buy/sell the underlying) at any time before or at expiration.
A European Option can be exercised only at expiration

- There are always two positions in an option contract:
BUYER and SELLER.
The buyer of an option has to pay a “price”, the so-called option premium. The seller of an option receives the option premium.
The option premium is an immediate expense for the buyer and an immediate return for the seller, whether or not the owner (=buyer) ever exercises the option

- Four basic positions in options:
(1) Buying a Call à Long Call

(2) Selling a Call à Short Call

(3) Buying a Put à Long Put

(4) Selling a Put à Short Put

Buyer (Long)

Seller (Short)

Put

- Obligation to deliver the underlying, if buyer exercises the option

- Pays the premium

Call

- Right to buy the underlying
(i.e. to exercise the option)

- Receives the premium

- Right to sell the underlying
(i.e. to exercise the option)

- Obligation to buy the underlying, if buyer exercises the option

- Pays the premium

- Receives the premium

GSU, Department of Finance, AFM
Spring 2014

r

- Chapters 10-11 / page 2 -

Introduction to Derivative Markets
FI 4200/AFM

Trading Options
- Different types of options: Stock options, Index options, Options on
Futures (like Commodity Futures, Stock Index Futures, Interest rate Futures, Currency Futures)

- Traded on Option Exchanges (EUREX, CBOE/CBOT, LIFFE, …)