The something that an option gives a person the right to buy or sell is the underlying
instrument. In case of index options, the underlying shall be an index like the Sensitive index DOW or S&P 500 or individual stocks. A class of options is all the puts and calls on a particular underlying instrument.
Liquidating an option
An option can be liquidated in three ways.
A closing buy or sell, abandonment or exercising. Buying and selling of options are the most common methods of liquidation.
An option gives the right to buy or sell a underlying instrument at a set price.
Call option owners can exercise their right to buy the underlying instrument.
The put option holders can exercise their right to sell the underlying instrument.
Only options holders can exercise the option. In general, exercising an option is considered the equivalent of buying or selling the underlying instrument for a consideration.
An option gives the right to buy or sell a underlying instrument at a set price.
Call option owners can exercise their right to buy the underlying instrument.
The put option holders can exercise their right to sell the underlying instrument.
Only options holders can exercise the option. In general, exercising an option is considered the equivalent of buying or selling the underlying instrument for a consideration.
Options that are in-the-money are almost certain to be exercised at expiration.
The only exceptions are those options that are less in-the-money than the transactions costs to exercise them at expiration.
Most option exercise occur within a few days of expiration because the time premium has dropped to a negligible or non-existent level.
An option can be abandoned if the premium left is less than the transaction costs of liquidating the same.
The only exceptions are those options that are less in-the-money than the transactions costs to exercise them at expiration.
Most option exercise occur within a few days of expiration because the time premium has dropped to a negligible or non-existent level.
An option can be abandoned if the premium left is less than the transaction costs of liquidating the same.
Option Pricing
Options prices are set by the negotiations between buyers and sellers.
Prices of options are influenced mainly by the expectations of future prices of the buyers and sellers and the relationship of the option's price with the price of the instrument.
An option price or premium has two components : intrinsic value and time or extrinsic value.
Prices of options are influenced mainly by the expectations of future prices of the buyers and sellers and the relationship of the option's price with the price of the instrument.
An option price or premium has two components : intrinsic value and time or extrinsic value.
The intrinsic value of an option is a function of its price and the strike price. The intrinsic value equals the in-the-money amount of the option.
The time value of an option is the amount that the premium exceeds the intrinsic value. Time value = Option premium - intrinsic value.
The time value of an option is the amount that the premium exceeds the intrinsic value. Time value = Option premium - intrinsic value.
