Option 

An option is an important trading instrument in the form of a contract that allows the holder to buy or sell the specified asset at a pre-agreed price for a certain period of time.

There are many options, but to help choose the best one, they are usually divided into several main types.

• 1. Options by type - call options or put options;
• 2. Options for the underlying asset - futures, stocks, commodities, currencies;
• 3. Different style of options - European options, American option and Asian options;
• 4. Options by type of settlement - an option with payment of a premium or an option without payment of a premium;
• 5. Options in market circulation.

Let’s consider each of these types in more detail.

Options by type

They are divided into two main types: call option (call) and put option (put).

A call option (buy option) - the owner of the option has the right to purchase a certain asset at the indicated price and within the indicated period of time. For example, if the buyer expects an increase in the value of, for example, stocks, after a certain date.

Put option (sell option) - the owner has the right to sell the asset at a fixed price within a certain period of time. For those who believe the price of assets will reduce in value.

It is important to note that the option holder is unable to use it.

The options market players are divided into the following categories:

• 1. Buyers of Call Options
• 2. Sellers of Call options
• 3. Buyers of Put Options
• 4. Sellers of Put options

Options depending on the underlying asset

Options of this type are divided into:

• 1 Commodity options. The owner of the option can buy or sell a specified amount of an asset (product) before a certain date, at a fixed price.
• 2 Stock options, An asset, which are the shares of a company
• 3 Currency options. Similar to a commodity option, but foreign currency is the asset for sale.
• 4 Options on cash goods - interest-bearing options on securities, the yield of which is fixed.
• 5 Options for indexes such as a Stock Indices Option. The value of the option asset depends on the value of a certain index.
• 6 Interest rate options. This type of option requires advance payment for a certain interest rate.
• 7 Options on a futures contract. As an asset which is bought and sold, a futures contract is used with a prescribed underlying asset and a specific time period (usually a month) for delivery.

Different style of options
 

• American - this option can be exercised on any day, before the deadline.
• European - this option can be exercised only after the expiration of the established period.
• Asian - this option can be exercised at a weighted average price at any time after the purchase.
• Typically, the American style is used by stock options, and over-the-counter options use European or Asian style.

Options by type of settlement

There are two types of options with regards to settlement: with payment of a premium and without payment of a premium. Options for which the buyer pays the seller a premium directly at the time of the transaction are called premium options.

There are two types of options in market circulation: an exchange option and an over-the-counter option.

Exchange options - all transactions occur through intermediaries and with a fee for their services. Only the value of the option premium is negotiated, the remaining parameters are set by the exchange. They are considered standard options.

OTC options - transactions occur without intermediaries, on negotiable terms. All parameters and conditions are set by the participants in the transaction.

The exercise price of the option is the price at which the underlying asset is bought or sold. The deal must go ahead before the deadline.

Quoted options are those options that are traded on large exchanges. Each option consists of one hundred shares of any company participating in the exchange.

Yield of an option is when the exercise of the option brings profit to the participants in the transaction.

Option premium - the buyer pays a certain amount to the seller of the option. The entire value of the option is called a premium. In fact, a premium is a payment for the possibility of concluding a future transaction. The value of the premium should be beneficial to both parties, and is determined by several factors: the price of the asset, the exercise time of the option, the price range, etc.

The option requires the presence of the following parameters:

• 1 style of the option (usually implies American or English)
• 2 the amount of the underlying asset that will be delivered upon exercise of the option
• 3 option expiration date
• 4 exercise date
• 5 price pairs
• 6 restrictions and other important information about the transaction and its participants