Options concept and types. OPTION: CONCEPT AND TYPES Homework Help - Finance Assignment Help

Here's what all these terms mean: Option: You pay for the option, or right, to make the transaction you want. You are under no obligation to do so.

Derivative: Options concept and types option derives its value from that of the underlying asset. This underlying value is one of the determinants of the option's price. Agreed-upon price: This is known as the strike price. It doesn't change over time, no matter what happens to the stock price.

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It has that name because you will strike when the underlying value makes you money. Certain time period: That's the time until the agreed-upon date, known as the expiration date. That's when your option expires. Two Major Types of Options There are two types of options. One gives you the right to buy the asset and the other gives you the right to sell it.

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A call option is "in the money" when the strike price is below the underlying stock value. If you bought the option and sold the stock today, you'd make money.

You buy call options when they believe the security will rise in value before the exercise date. If that happens, you'll exercise the option. You'll buy the security at the strike price and then immediately sell it at the higher market price.

Put Options and Call Options

If you feel bullishyou might also wait to see if the price goes even higher. Buyers of call options are called holders. That's called being in the money. The profit is called the option's intrinsic value.

If the price doesn't rise above the strike price, you won't options concept and types the option. Your only loss is the premium. That's true even if the stock plummets to zero. Why wouldn't you just buy the security instead? Buying a call option gives you more leverage.

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If the price rises, you can make a lot more money than if you bought the security instead. Even better, you only lose a fixed amount if the price drops. As a result, you can gain a high return for a low investment.

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The other advantage is that you can sell the option itself if the price rises. You've made money without ever having to pay for the security. You would sell a call option if you believe the asset price will drop.

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If it drops below the strike price, you keep the premium. A put option is "in the money" when the strike price is above the underlying stock value. So, if you bought the option to sell, and bought the stock today, you'd make money because your purchase price was lower than your sale price.

Six Determinants of Options Pricing There are six components that determine the price of the option: Value of the underlying asset. As it increases, the right to buy it will become more valuable.

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The right to sell it becomes less valuable.