9

Options

Motivation behind option trading

Option contract specifications

Types of option contracts

Option contract risks and benefits

Ideas behind option pricing

Put–call parity

Option value sensitivities – ‘option Greeks’

Option pricing: practical implementation

MOTIVATION BEHIND OPTION TRADING

An option gives the buyer the right but not the obligation to enter at a future date into a transaction specified today. The buyer will obviously use it to his advantage and only exercise the option if it is beneficial compared to the prevailing market conditions at expiry. In the event of exercise the option seller must fulfil his obligation at loss. To accept this risk he charges a premium payable up-front. Clearly all the buyer can lose is the ...

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