Page 76 - DMGT513_DERIVATIVES_AND_RISK_MANAGEMENT

Unit 6: Introduction to Options

Self Assessment Notes

Fill in the blanks:
15. An …………..option has its payoff linked to the average price of an asset over a period of
time.

16. …………. options are a type of path-dependent option.

6.6 Summary

 An option is a contract that gives the buyer the right, but not the obligation, to buy or sell
an underlying asset at a specific price on or before a certain date.
 An option, just like a stock or bond, is a security. There are two basic types of options – call
options and put options.

 There are three main categories of options: European, American and Bermudan.
 There are four types of participants in options markets namely, Buyers of calls, Sellers of
calls, Buyers of puts and Sellers of puts.

 The Options Clearing Corporation is the sole issuer of all options listed at the Chicago
Board of Options Exchange (CBOE) and other U.S. options exchanges.
 In India, NSE has an associated clearing house attached to it for futures and options trading.
Some of the important terms used in option trading are: Option Class, Option price, Strike
Price, Expiration date and others.

 There are three positions in an options – In-the-money; At-the-money; and Out-of-the-
money.

 The option premium can be broken down into two components – intrinsic value and time
value.

6.7 Keywords

American Options: American options are options that can be exercised at any time upto the
expiration date. Most exchange-traded options are American.
At-the-money Option: An at-the-money (ATM) option is an option that would lead to zero
cashflow if it were exercised immediately.

Call Option: A call option gives the holder the right but not the obligation to buy an asset by a
certain date for a certain price.
European Options: European options are options that can be exercised only on the expiration
date itself.
Expiration Date: The date specified in the options contract is known as the expiration date, the
exercise date, the strike date or the maturity.
Index Derivatives: Index derivatives are derivative contracts which derive their value from an
underlying index.

Option Premium: The "price" an option buyer pays and an option writer receives is known as the
premium.
Option: An option is a contract that gives the buyer the right, but not the obligation, to buy or
sell an underlying asset at a specific price on or before a certain date.

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