The options are derivative financial instruments or financial assets. Their value derives from that of an asset called the underlying asset.
The options are contracts that, upon payment of a premium to the seller, attribute to the buyer the right to conclude a sale on a given asset in a future period.
If the contract gives me the right to buy a particular asset, we talk about call options. If the contract gives me the right to sell a specific asset, we talk about put options.
The buyer will exercise the option when the conditions are convenient for him.
Options in the money – at the money – out of the money
The option is convenient when the option is:
in the money: it is convenient to exercise the option;
at the money: it is indifferent to exercise the option or not;
out of the money: it is not convenient to exercise the option.
In a more technical discussion of the subject, we also define the conditions deep in the money and deep out of the money, or conditions in which the exercise of the option is, respectively, very or not at all convenient or very or unlikely.
In the beginning, the prize is how much the buyers pay to the sellers to have the right to exercise the option; of course, this is not refundable.
The premium is, therefore, the price or the value of the option.
If this exercise can only be carried out at maturity, on a specific future date, we talk about European-style options.
If the exercise is allowed at any time, after the option is concluded, until the expiry, we talk about American style options.
The options are also defined as asymmetric contracts because the seller is subject to the will of the buyer but not the opposite.
More from Finance Strategy System
More Resources: Wikipedia
Why should you use the Hull Moving Average? This article shows you the pros and cons of this fantastic indicator and how to use it with graphical examples. There are many...
Download for free the MTF MACD MT4 indicator and learn how to use it. This fantastic indicator will show the trend of 4 different time frames. The MACD is an excellent trend...