UNIT 3 OPTIONS

Introduction

Recap

OTHER OPTIONS Exchange-traded options Exchange-traded options (also called "listed options") are a class of Exchange-traded derivatives. Exchange traded options have standardized contracts, and are settled through a clearing house with fulfillment guaranteed by the Options Clearing Corporation (OCC). Since the contracts are standardized, accurate pricing models are often available. Exchange- traded options include: stock options, bond options and other interest rate options stock market index options or, simply, index options and options on futures contracts callable bull/bear contract  

OTHER OPTIONS Over-the-counter This options (OTC options, also called "dealer options") are traded between two private parties, and are not listed on an exchange. The terms of an OTC option are unrestricted and may be individually tailored to meet any business need. In general, at least one of the counterparties to an OTC option is a well-capitalized institution. Option types commonly traded over the counter include: interest rate options currency cross rate options, and options on swaps or swaptions.

OTHER OPTIONS American Option: European Options: It can be exercised at any time up to and including the expiration date. Thus call & put options apply to the American option only. European Options: An option that can only be exercised at the end of its life, at its maturity. European options tend to sometimes trade at a discount to its comparable American option. This is because American options allow investors more opportunities to exercise the contract.

An American option is an option that can be exercised anytime during its life. American options allow option holders to exercise the option at any time prior to and including its maturity date, thus increasing the value of the option to the holder relative to European options, which can only be exercised at maturity. The majority of exchange traded options are American.

American Option American options allow the holder to buy or sell a specified underlying asset, on or before a predetermined expiration date. Since investors have the freedom to exercise their American options at any point during the life of the contract, they are more valuable than European options, which can only be exercised at maturity. The last day to exercise a weekly American option is normally on the Friday of the week in which the option contract expires. Conversely, the last day to exercise a monthly American option is normally the third Friday of the month. Note that the name of this option style has nothing to do with the geographic location.

Break …..

European option A European option is an option that can only be exercised at the end of its life, at its maturity. European options tend to sometimes trade at a discount to their comparable American option because American options allow investors more opportunities to exercise the contract. European options normally trade over the counter, while American options usually trade on standardized exchanges.

European options are contracts that give the owner the right, but not the obligation, to buy or sell the underlying security at a specific price, known as the strike price, on the option's expiration date. A European call option gives the owner the right to purchase the underlying security, while a European put option gives the owner the right to sell the underlying security. A buyer of a European option who does not want to wait for maturity to exercise it can sell the option to close the position.

European vs. American and Bermudan Options Owners of European options can only exercise the option on the expiration date. American options allow the owner to exercise the option any time between purchase and the expiration date. Bermudan options are custom contracts that give the owner the right to exercise the option on a variety of specified dates in the contract. Most equity options traded in the United States are American style, while most index options traded are European style

Evaluation

Conclusion American Option European Option Bermudan Option