Option: you have the choice to buy something for a certain price but if the price is less than that price forget about the contract. The most you ever pay is the contract price. You have the possibility of doing better. Nothing to lose only gain since you locked in a certain price; seller of contract can only do worse. The person who makes the contract charges a price to enter into the contract, the seller keeps this contract. This price is called the premium, options start life with a value, it is an impure derivative.
The underlying is instrument is what the contract is about the person who buys the contract Is known as the option buyer/investor, the seller is known as the option writer/issuer, what you pay if you exercise the contract is known as the strike price or exercise price. Options have expiration days after that we can not use them anymore, another parameter is the type of option that it is Six parameters: Underwriting asset, parties involved, strike price/exercise price, expiration date, type of option.
The premium fluctuates with demand, the contract could be sold Underlying: SBUX 1,000 Strike Price: 60 a share 1 Month: Type: Call Premium: 8 If you do not exercise the option it is allowed to expire Options come in types, styles, and classes Put option right to sell at a certain price Put option: Underlying: six, 1000 shares, spot price 55 Strike price: 50 Time: 1 Month Premium: in a put option you pay for the buy to sell.
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Options come in three styles:
- European Style: You can exercise on a certain date, only at expiration.
- American Style: You can exercise at any time, makes premium from an American option more but not by much only worth a lot more when dividends high dividends and low-interest rates are present Bermuda
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