What is an Option?
An option is a contract giving the buyer the right, but not obligation to buy or sell an underlying asset at specific price on or before a certain date. Option also called derivatives because option price always derives from the value of the underlying (be it stock, index or some commodity). Option buyer (holder) can …
Puts Option
An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buy shares. Put Options are used when we expect the price …
Calls Option
A call option is an option contract in which the holder (buyer) has the right (but not the obligation) to buy a specified quantity of a security at a specified price (strike price) within a fixed period of time (until its expiration). For the writer (seller) of a call option, it represents an obligation to …
Option Strike Price
The price at which a specific derivative contract can be exercised. Strike prices is mostly used to describe stock and index options, in which strike prices are fixed in the contract. For call options, the strike price is where the security can be bought (up to the expiration date), while for put options the strike price is …
Option Premium
Option Premium is the amount paid for an option. It can be further broken down into intrinsic value and time value. Based on the above image, GOOG represents the option class while DEC 11 is the option series. There are many different option series of GOOG. An option premium is the price of the option. …
Open Interest
Open interest refers to the numbers of outstanding contracts of a particular option. By knowing this number, we have a good indication of the liquidity of the option. The rules are not to trade option with low open interest and do not invest more than 10% of the open interest. Open interest could also be …
Option Pricing
Option Price = Intrinsic Value + Extrinsic Value (volatility & time value) Intrinsic Value This is a representation of the underlying stock price in relation the strike prices of the option. An option’s intrinsic value is the amount by which it is In the Money. At the Money (ATM) – a term used to describe …