Mastering Derivatives Markets, 4th Edition

5

Basic Option Concepts

‘... the test for this is that if all options were free of charge with no premium payable, most derivatives users would use them most of the time.’

Introduction

Option pricing

Option mechanics

INTRODUCTION

An option contract is the only derivative instrument that allows the buyer (holder) to ‘walk away’ from his obligations. This is unique amongst derivatives. With most derivatives and forward contracts the client is provided with a guaranteed rate; this is an obligation to deal at that rate. These products provide certainty, whatever the resulting market conditions. In contrast, option contracts allow the holder the best of both worlds; insurance when things go wrong, and when things go right, the ability to walk ...