Go Back   ManagementParadise.com | Management & Business Education Learning Platform PUBLISH / UPLOAD PROJECT OR DOWNLOAD REFERENCE PROJECT > Financial Management

Options Contract

Discuss Options Contract within the Financial Management forums, part of the PUBLISH / UPLOAD PROJECT OR DOWNLOAD REFERENCE PROJECT category; Options on commodities have existed indifferent forms since 1860 for various commodities in the US, but as the contracts were ...

Reply

 

Thread Tools Display Modes
Options Contract
Old
 (1 (permalink))
Sunanda K. Chavan
sunandaC has a spectacular aura aboutsunandaC has a spectacular aura aboutsunandaC has a spectacular aura about
 
sunandaC
Management Paradise Guru
 
Status: Offline
Posts: 6,680
Join Date: Jul 2010
Options Contract - October 19th, 2010

Options on commodities have existed indifferent forms since 1860 for various commodities in the US, but as the contracts were not regulated, intermediaries resorted to large scale manipulations and these contracts lost popularity and disappeared from the exchanges by 1968. They became again popular in the 70’s in London and by 1981; the CFTC was created and started regulating and popularizing the options on commodities and options on future contracts. At present in India the options contract in commodity market is not used.
An option means a choice, but not an obligation, to enter into a trade to buy or sell a specified commodity or underlying asset, on or before a specified date. An option contract provides a downside protection against risk and also an upside benefit from favorable movements in the underlying asset prices.
In an options contract, there are four ways of trading:
 Buying a call option (gives the buyer the choice to buy the underlying asset/futures contract from the seller).

 Selling a call option (gives the seller the obligation to sell the underlying asset/futures contract from the buyer).

 Buying a put option (gives the buyer the choice to sell the underlying asset/futures contract to the seller).

 Selling a put option (gives the seller the obligation to buy the underlying asset/futures contract from the buyer).

Options can be traded on commodities or in order to protect one futures position, which is also known as creating synthetic positions.
Option price: Option price is the price which the option buyer pays to the option seller. It is also referred to as the option premium.
Expiration date: The date specified in the options contract is known as the expiration date, the exercise date, the strike date or the maturity.
Strike price: The price specified in the options contract is known as the strike price or the exercise price.
American options: American options are options that can be exercised at any time up to the expiration date. Most exchange-traded options are American.
European options: European options are options that can be exercised only on the expiration date itself. European options are easier to analyse than American options, and properties of an American option are frequently deduced from those of its European counterpart.
In-the-money option: An in-the-money (ITM) option is an option that would lead to a positive cash flow to the holder if it were exercised immediately. A call option on the index is said to be in-the-money when the current index stands at a level higher than the strike price (i.e. spot price > strike price). If the index is much higher than the strike price, the call is said to be deep ITM. In the case of a put, the put is ITM if the index is below the strike price.
At-the-money option: An at-the-money (ATM) option is an option that would lead to zero cash flow if it were exercised immediately. An option on the index is at-the-money when the current index equals the strike price (i.e. spot price = strike price).
Out-of-the-money option: An out-of-the-money (OTM) option is an option that would lead to a negative cash flow it was exercised immediately. A call option on the index is out-of-the-money when the current index stands at a level which is less than the strike price (i.e. spot price < strike price). If the index is much lower than the strike price, the call is said to be deep OTM. In the case of a put, the put is OTM if the index is above the strike price.
Advertisements

Friends: (0)
Reply With Quote
Reply

Bookmarks

Tags
contract, options
Related to Options Contract
 

Similar Threads

Thread Thread Starter Forum Replies Last Post
law of contract asif_iq80 Business and Industrial LAW 8 May 3rd, 2016 12:16 PM
contract act notes aashuchatt LAW 22 January 23rd, 2011 08:34 PM
Contract Expiry for the Futures contract Abhijeet S Financial Markets 0 September 10th, 2010 11:54 AM
contract act Poorti A Articles !! 0 November 7th, 2009 02:21 PM
 


Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is On
Trackbacks are On
Pingbacks are On
Refbacks are Off


ManagementParadise.com is not responsible for the views and opinion of the posters. The posters and only posters shall be liable for any copyright infringement.



Search Engine Optimization by vBSEO ©2011, Crawlability, Inc.