Options
Options are financial contracts that convey the right, but not the obligation, to engage in a future transaction between two parties (the buyer and seller). There are two types of options that will be discussed on this blog , American call options and American put options.
For an explanation of terms in this blog please see:

Call Options
The buyer of a call option pays a premium in order to have the right to buy an agreed quanity of a particular commodity from the seller of the option before the expiration date. The buyer of the call option wants the price of the stock to go up. When the price of the underlying instrument surpasses the strike price, the option is said to be in the money. An American call option allows the buyer to exercise at any time during the life of the option.

Put Options
The buyer of a put option pays a premium in order to have the right to sell a stock at the strike price any time before the expiration date of the contract. The buyer pays a premium in exchange for having the option. The buyer of a put option wants the stock price to fall by the exercise date. An American Put option allows the buyer to exercise at any time during the life of the option.

The terms of the option are specified on a term sheet.

Each option contract has the following specifications:

Whether it is a call or a put option
Quantity of shares
Strike price
Expiration date
Settlement terms
The multiplier (usually 100) to convert the actual price to the actual premium amount.

This entry was posted on Tuesday, December 11th, 2007 at 2:25 pm and is filed under Options Explained. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.