The financial options are similar for the futures contracts in which only a small part of the value of the underlying title needs to be paid initially. This type of deal can go to big earnings or losses with small investments.
An option is a contract which holder has the following rights (although not obligations) on assets:
- Right to acquire (if it is a call option)
- Right to sell (if it is a put)
The assets will be fastened at a price for a period of certain time, specified in the contract. The price that is paid for the option is named a premium. The option, inside the financial ambience it presents numerous variants, both for the purpose of the business, and for his simple use, or combined with other financial instruments (futures, other options, etc).
The option contract has a difference with regard to the forward, future and swaps, and the fact is that in these obligations contract, whereas in the option contracts there is acquired the right to buy a certain assets. These assets can be a type of interest, a currency, any role of fixed or variable revenue etc.
Types of option
Two types of options can exist:
- Call option (call options)
- Put (putt options)
Basic positions of the options:
SELLING BUYER
CALL Right to buy Obligation to sell
PUTT Right to sell Obligation to buy
Therefore, of this picture it is clear that there will be four positions as (call) call options or puts (putt) are bought or sold:
The buyer of an option call, has right, in exchange for a premium, to buy an underlying assets in the due date (if it is a question of a European option) or in any moment (if it is a question of an American option), in exchange for a price prearranged in contract.
The seller of an option call, therefore, and in exchange for the perception of the premium, has obligation to sell an underlying assets in the due date (if it is a question of an European option) or in any moment (if it is a question of an American option). It will be forced to satisfy the contractual requests of the buyer.
The buyer of an option putt, has right, in exchange for the payment of a premium, to sell the underlying assets, at the certain price of exercise in the due date (if it is a question of a European option) or in any moment (s// it is a question of an American option).
The seller of an option trading putt has the obligation, in exchange for receiving the premium, to always buy the assets in the due date (if it is a question of an European option) or in any moment (if it is a question of an American option), to request of the buyer of the option.
