Option Payoff Values

An option’s payoff defines as the price an investor would be willing to pay for the option the instant before it expires. An option’s payoff is distinct from its price or premium because the payoff only refers to the price …

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Put-Call Parity

Put-call parity is a financial relationship between the price of a put option and a call option with the same characteristics (strike price and expiration date). The put-call parity is a concept related to a European call and put options. …

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Determinants of Option Pricing

The price at which the stock under option may be put or called is the contract price. Sometimes, it is referred to as the striking price. During the life of the contract, the contract price remains fixed, except that market …

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Components of Options Pricing

The total value of an option consists of intrinsic value, which is simply how far in-the-money an option is, and time value, which is the difference between the price paid and the intrinsic value. Thus, Option Price = Intrinsic Value …

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Introduction to Options Pricing

Option price or option premium is the amount per share that an option buyer pays to the seller. The premium is the price at which the contract trades. The premium is the price of the option and is paid by …

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Difference between Options and Futures

Here is a comparison of some of the main differences between options and futures: Basis of Difference Options Futures 1. Meaning Options confer the right but not the obligation on buyers to buy or sell foreign currencies. Futures oblige buyers …

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Disadvantages of Options

The disadvantages of options are as follows: 1. Costly: The cost of trading options including both commissions and the bid is higher on a percentage basis than trading the underlying stock. 2. Complex Process: Understanding options trading requires great observation …

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Advantages of Options

The advantages of options trading are as follows: 1. Risk Management: Put options allow hedging against a possible fall in the value of shares one holds. 2. Time to Decide: By taking a call option, the purchase price for the …

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Participants in the Options Market

There are four types of participants in options markets depending on the Potion they take. People who buy options are called holders, and those who sell options are called writers; furthermore, buyers are said to have long positions, and sellers …

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Types of Options

Basically, there are four types of options: Call Options In a call option, the option buyer has the right (but not the obligation) to buy the commodity at the predetermined price (in a sense, ‘call’ for the item from the …

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