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OPTIONS - Investments tip

 

 


What are options?

An option is a contract between two parties – the buyer of the option and the seller of the option (issuer). The option grants the buyer the right to buy or sell an underlying asset at a specific price at a later time from or to respectively the issuer of the option. The buyer of the option pays a fee, known as a premium, to the seller for this right.

There are two sorts of options – the call option and the put option. The put option grants the buyer the right to buy a certain amount, stated in the option, of an underlying asset at a specific price, also stated in the option, during or on the  expiration date of the option. The put option grants the buyer the right to sell an agreed amount of an underlying asset at a certain price. The agreed upon price in both options is called the strike rate.


 

The holder of the option is not obligated to exercise the right granted to him by the option, but should he choose to do so the seller (issuer) of the option is forced to fulfill the terms agreed upon in the option. Every option has an expiration date, if the holder of the option fails to exercise his right before or on the expiration date then he loses the ability to exercise his right and the option becomes void.

The underlying asset of an option can be a wide variety of financial assets but is limited to only one. Some of the possible underlying assets are: shares of stock, property, bonds, futures, commodities, etc.

There are several types of options, but the most known and generally used type are listed options which fall under the category of exchange traded derivatives. This type of options includes stock options, futures options, bond options, index options and commodity options.
Another type of options are the dealer options or also known as over-the-counter options which are traded between private parties, the terms of which are unrestricted – which makes them a favorable type for large businesses and institutions.

Listed options are a popular means of investing amongst day traders and speculative investors. The reason for this is because the price of listed options can rise and fall very rapidly in response to various market developments. If someone has a call option which lets them buy a set amount of shares of company A at a specific price and the company releases its quarterly figures which turn out to be much better than expected, its shares will very rapidly increase in price – this in turn increases the price of that particular call option because it enables the holder to buy the shares of company A for less than what they will be worth. However, the risk in this scenario becomes very apparent as well. If company A’s quarterly report turned out to be worse than what was expected, then the price of its shares will decrease in value and the call option then becomes practically useless, after all no one will want to use it to buy company A’s shares at a higher price than what they’re trading for.

These characteristics make listed options a very speculative method of investment.

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Subjects keywords: Options, Definition of the options, call option, put option, investment options, financial options, listed options. All information about options.


 

   
 

 

 

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