PipStory

A put option which is sometimes simply call as put is a name given to a financial contract between two parties, the seller (writer) and the buyer of the option. a short position has been acquired by the buyer and it is there right, but not obligation, to sell the underlying instrument at an agreed-upon price (the strike price). If the right has been exercised by the buyer that is granted by the option then the seller has the obligation that he has to purchase the underlying at the strike price. For having this option, fees (the option premium) has been paid by the buyer to the writer. The terms for exercise differ and that depends on option style.

The holder is allowed by the European put option that he can exercise the put option for a short period of time right before expiration, while by an American put option the holder is allowed to exercise at any time before expiration.

The put options that are most widely-traded are the put options on equities. However, there are many other instruments on which options are traded such as interest rates or commodities.

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Below are given the differences that Employee stock options have from standardized, exchange-traded options:

• Strike: It has the strike price which is non-standardized and it  is usually the current price of the company stock at the time of issue. Alternatively, it is possible that a formula might be used, such as sampling the lowest closing price over a 30-day window on either side of the grant date. Usually, an employee may posses ESOs that struck at different times and different strike prices.
• Quantity: Typically standardized stock options posses 100 shares per contract. Usually ESOs posses some non-standardized amount.

• Vesting: Usually there will be an increase in the number of shares that are available to be exercised at the strike price as time passes according to some vesting schedule. Vesting only takes place during the duration of the employment.

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In this article I am explaining you the call option by giving you an example.

Buy a Call:

It is expected by the buyer that the price may go above his chosen ‘strike price’. A premium is being paid by him that will never be refunded, and he possess the right to exercise the option at the strike price, what it means is that he can choose to buy the stock at the strike price. If the price goes up enough as anticipated by the buyer then the buyer pays the strike price to actually purchase the stock. After purchasing, he can then choose to either hold the stock, or sell it to realize his profit.

Write a Call:

The premium is received by the writer. If it is decided by the buyer that he will exercise the option, then the writer has the obligation to sell the stock at the strike price. If the buyer does not exercise the option, then the writer still gains profits in the amount of the premium.

• ‘Trader A’ (Call Buyer) have purchased a Call contract in order to buy 100 shares of XYZ Corp from ‘Trader B’ (Call Writer) at $50_/share. The current price is $45_/share, and premium of $5_/share is being paid by ‘Trader A’ pays. If right before expiration the share price of XYZ stock rises to $60_/share , then ‘Trader A’ is now able to exercise the call by buying 100 shares for $5,000 from ‘Trader B’ and sell them at $6,000 in the stock market.

A financial contract between two parties i.e. the buyer and the seller of this type of option, is referred to as a call option. It is the option to buy shares of stock at a specified time in the future. Usually it is simply labeled a “call”. In call option, the buyer of the option has the right, but it is not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying instrument) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price). The seller (or “writer”) is obligated to sell the same commodity or financial instrument that is so decided by the buyer. For this right the buyer pays a fee that is referred to as a premium.

Buyer and Seller Anticipation

It is the will of the buyer of a call option that the price of the underlying instrument may rise in the future; the seller either anticipates that it will not rise, or he might be willing to give up some of the upside (profit) from a price rise in return for the premium (paid immediately) and retaining the opportunity to make a gain up to the strike price.

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In finance, an OTC-traded financial instrument that facilitates an option to buy or sell a particular bond at a certain date for a particular price is referred to as bond option. It is identical to a stock option having only one difference and that is the underlying asset is a bond. Black model is used to value bond options.

The bond’s present market value is known as the spot price while the bond’s future value as per the option is known as the strike price.

Types

• An option to buy or sell a bond at a certain date in future for a predetermined price is known as European bond option.

• An option to buy or sell a bond on or before a certain date in future for a predetermined price is known as American Bond option.

Embedded Option

For option-like features of some bonds the term "bond option" is also used. Rather than a separately traded product these are an inherent part of the bond. A bond may have lots of options embedded as these options are not mutually exclusive.

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In options, a key variable in a derivatives contract between two parties is known as the strike price, or exercise price. Where the delivery of the underlying instrument is required by the contract, the trade will be at the strike price, regardless of the spot price (market price) of the underlying instrument at that time.

Definition of Strike Price 

The strike price is the fixed price at which the owner of an option is able to purchase the underlying security or commodity, in the case of a call, or sell, it in the case of a put. When the option is exercised it is that price  at which the stock will be bought or sold.

Usually the strike price is referred to as the exercise price.

For instance, an IBM May 50 Call has a strike/exercise price of $50 a share. When the option is exercised 100 shares of IBM stock for $50 a share will be bought (Call option) by the owner of the option.

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