option trading in future

Jun 28th, 2015
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A. T. Still University
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It is called an option because the buyer is not obliged to carry out the transaction. If, over the life of the contract, the asset value decreases, the buyer can simply elect not to exercise his/her right to buy/sell the asset. There are two types of option contracts - Call options and Put options. A Call option gives the buyer the right to buy the underlying asset, while a Put option gives the buyer the right to sell the underlying asset.

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Option Pricing Theory andApplicationsAswath DamodaranWhat is an option?lllAn option provides the holder with the right to buy or sell a specifiedquantity of an underlying asset at a fixed price (called a strike price oran exercise price) at or before the expiration date of the option.Since it is a right and not an obligation, the holder can choose not toexercise the right and allow the option to expire.There are two types of options - call options (right to buy) and putoptions (right to sell).Call OptionsllA call option gives the buyer of the option the right to buy theunderlying asset at a fixed price (strike price or K) at any time prior tothe expiration date of the option. The buyer pays a price for this right.At expiration, If the value of the underlying asset (S) > Strike Price(K)lBuyer makes the difference: S - K If the value of the underlying asset (S) < Strike Price (K)llBuyer does not exerciseMore generally, the value of a call increases as the value of the underlying asset increases the value of a call decreases as the value of the underlying asset decreasesPayoff Diagram on a CallNet Payoffon CallStrikePricePrice of underlying assetPut OptionsllA put option gives the buyer of the option the right to sell theunderlying asset at a fixed price at any time prior to the expiration dateof the option. The buyer pays a price for this right.At expiration, If the value of the underlying asset (S

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