Options trading wikipedia
Options spreads are the basic building blocks of many options trading strategies. A spread position is entered by buying and selling equal number of options of the same class on the same underlying security but with different strike prices or expiration dates.
Options trading wikipedia three main classes of spreads are the horizontal spread, the vertical spread and the diagonal spread. They are grouped by the relationships between the strike price and expiration dates of the options involved.
Vertical spreadsor money spreads, are spreads involving options of the same underlying security, same expiration month, but at different strike prices. Horizontal, calendar spreadsor time spreads are created using options of the same underlying security, same strike prices but with different expiration dates. Diagonal spreads are constructed using options of the same underlying security but different strike prices and expiration dates.
They are called diagonal spreads because they are a combination of vertical and horizontal spreads. Any spread that is constructed using calls can options trading wikipedia referred to as a call spread, while a put spread is constructed using put options. If a spread is designed to profit from a rise in the price of the underlying security, it is a bull spread. A bear spread is a spread where favorable options trading wikipedia is obtained when the price of the underlying security goes down.
If the premiums of the options sold is higher than the premiums of the options purchased, then a net credit is received when entering the spread. If the options trading wikipedia is true, then a debit is taken. Spreads that are entered on a debit are known as debit spreads while those entered on a credit are known as credit spreads.
There are also spreads in which unequal number of options are simultaneously purchased and written. When more options are written than purchased, it is a ratio spread. When more options are purchased than written, it is a backspread. Many options options trading wikipedia are built around spreads and combinations of spreads.
For example, a bull put spread is basically a bull spread that options trading wikipedia also a credit spread while the iron butterfly can be broken down into a combination of a bull put spread options trading wikipedia a bear call spread. A box spread consists of a bull call spread and a bear put spread. The calls and puts have the same expiration date. The resulting portfolio is delta neutral.
For example, a January box consists options trading wikipedia. A box spread position has a constant payoff at exercise equal to the difference in strike values. Thus, the box example above is worth 10 at exercise. For this reason, a box is sometimes considered a "pure interest rate play" because buying one basically constitutes lending some money to the counterparty until exercise. The net volatility of an option spread trade is the volatility level such that the theoretical value of the spread options trading wikipedia is equal to options trading wikipedia spread's market price.
In practice, it can be considered the implied volatility of the option spread. From Wikipedia, the free encyclopedia. For the American football offensive scheme, see Spread offense. This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. April Learn how and when to remove this template message. Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative.
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A call optionoften simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option. The seller or "writer" is obligated to sell the commodity or financial instrument to the buyer if the buyer so decides.
The buyer pays a fee called a premium for this right. The term "call" comes from the fact that the owner has the right to "call the stock away" from the seller. Option values vary with the value of the underlying instrument over time.
The price of the call contract must reflect the "likelihood" or chance of the call finishing in-the-money. The call contract price generally will be higher when the contract has more time to expire except in cases when a significant dividend is present and when the underlying financial instrument shows more volatility. Determining this value is one of the central functions of financial options trading wikipedia. The most common method used is the Black—Scholes formula.
Importantly, the Black-Scholes formula provides an estimate options trading wikipedia the price of European-style options. Adjustment to Call Option: When a call option is in-the-money i. Some of them are as follows:. Similarly if the buyer is making loss on his position options trading wikipedia.
Trading options involves a constant monitoring of the option value, which is affected by the following factors:. Moreover, the dependence of the option value to price, volatility and time is not linear — which makes the analysis even more complex.
From Wikipedia, the free encyclopedia. This article is about financial options. For call options in general, see Option law. This article needs additional citations options trading wikipedia verification. Please help improve this article by adding citations to reliable options trading wikipedia. Unsourced material may be challenged and removed. October Learn how and when to remove this template message. Upper Saddle River, New Jersey A Practical Guide for Managers.
Why do you recommend this news source? This is an introduction to Options Trading. This page focuses on plain-vanilla options, puts and calls and should serve as a general overview of how options are constructed, options options trading wikipedia and how options payoff. Options can be confusing because they add another level of complexity to investing. They also have a unique terminology that must be mastered to understand what a particular option contract represents. Perhaps the most common misunderstanding for those options trading wikipedia to options, is the idea that no shares of the underlying security change hands when an option is written or purchased; an option is nothing more than a contract between two parties.
Options are a type of financial security, just like stocksbonds and mutual fundsand can be bought and sold just as easily as one buys and sells stocks. Options are known as derivative investments because their value is derived from the value of the underlying stock when buying or selling options on stocks or commodity when buying or selling options on commodity futures. Generally, options are used as a tool to make more leveraged investments in common securities. Because they are less expensive than the underlying asset, relative percent return that can options trading wikipedia achieved through options is significantly higher than on the underlying asset alone.
The graph below shows just that. With the advent of low commission online brokers offering options, it is becoming easier to invest in options. This is a good thing for retail investors as it allows them to take advantage of the two main benefits of trading options: It is also a potentially dangerous situation since options, especially individual options, generally entail more risk than the underlying security and this risk is magnified when investors do not know how to invest in options appropriately.
The purpose of this options trading wikipedia is to educate investors on how options are priced and how to use options to augment one's current investment goals. Exercising the option - This is the buying or selling options trading wikipedia the underlying asset via the option contract. Strike or exercise price - This is the fixed price in the option contract at which the holder investor can buy or sell the underlying asset e.
Expiration date - The maturity date of the option; the option doesn't exist after this date. Calls and puts are the two types of "plain vanilla" options, and most advanced option positions are constructed using a combination of calls and puts. There are also two types of standard put and call options, known as American options and European options.
The difference between the two has nothing to do with physical geography, but rather how and when the options can be exercised.
American options can be exercised anytime before the option contract expires, while European options can only be exercised on the expiration date. Options traded publicly on exchanges are nearly always American options, while options that are traded over the counter are mainly European options.
For standard put and call options the payoff to the option holder is relatively simple. Note that when talking about option payoffs it is convention to ignore the price of the option and consider only the amount of money the holder gets for holding the contract to maturity. The holder of options trading wikipedia call option will options trading wikipedia execute the option if, on maturity, the current price of the underlying asset is greater than the strike price.
If this is the case, the call holder can purchase shares at the strike price and sell shares at the market price, netting the difference as profit. In the case that the strike price is greater than the price of the underlying asset at options trading wikipedia time of maturity, the call option is worthless - the holder options trading wikipedia prefer to purchase the asset at the current market price and thus would not exercise the option.
The payoff of a plain-vanilla call option at maturity is. The graph below shows the relationship between the payoff of a call option and the price of the underlying security at maturity.
The holder of a put option has the right but not the obligation to sell shares of the underlying asset at the strike price upon maturity. As such, it is only profitable for the holder to do so if they can sell the shares when the strike price is greater than the market price at maturity. The value of a put option at maturity is. An option's value and payoff is directly related to the price and volatility of an underlying asset, as well as factors such as the proximity to the expiration date.
Options can be valued using different valuation methods including the popular Black-Scholes Model which uses many variables to calculate the estimated value of an options trading wikipedia. When someone purchases 1 call option on a stock which expires in 1 year, the value of the option will increase as the underlying security rises in value. At the options trading wikipedia time, the option will slowly lose time value as time progresses and the option gets closer to the expiration date.
Most options expire worthless at expiration becuase they are "out of the money. On the options trading wikipedia side, a put option is considered "out of the money" when the underlying stock price is trading above the strike price of the option. From the makers of. Unable to complete your request. Please refresh your browser.
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