Chapter 12



Options are nonlinear derivatives which give the buyer certain rights. A buyer of call options has the right but not the obligation to own the underlying asset at a specified or “strike” price. The seller or short is under the obligation to sell the underlying asset at the strike price to the buyer. The buyer must pay a “premium” to the seller. Options are traded on individual equities, equity indexes, bonds, currencies, and commodities. The basic option types are puts and calls. The four basic option strategies are: Long call, long put, short call, and short put. By combining the basic option strategies, investors and traders can tailor a derivative strategy to flexibly accomplish many different objectives. Black–Scholes–Merton ...

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