Please enable JavaScript.
Coggle requires JavaScript to display documents.
Options (Option premiums (The calculation is based on two factors (The…
Options
Option premiums
Live prices for both call options and put options are available on Euronext's website and also on many specialised brokers websites
Each premium will have both bid and offer prices and there will be considerable spreads between them
-
-
-
-
-
Option premiums will be more expensive the further away the expiry date is as the option writer is exposed to risk for a longer period of time
Risks
Purchasers of either call or put options will also know their maximum potential downside - this is limited to the price paid for the option premium plus any transaction costs involved
If the market does not move as anticipated, option holders may decide to abandon their options and thus lose their premiums
An option holder will not exercise a call option if the strike price is higher than the spot price. The market price must be higher in order for the holder to make a profit
-
-
If writing naked options, the risks can be quite considerable. For call options, writers will have to go into the equities to buy shares to sell to the holder (or if cash settled pay the cash difference). With put options, writers will be committed to buying the underlying security and then can either sell at a loss in the market or hold and hope that the price will recover
Users & Uses
-
It might provide difficult for individual investors if wanting to trade OTC options but there are brokers to help with this, such brokers will require a minimum opening balance of £10,000
-
Hedgers
Attempt to reduce their exposure by covering existing positions rather like taking out an insurance policy
-
Rewards
Writer will be hoping that matters will not go as the holders have anticipated, in which case they will keep the option premium as their profit
In the money options: Where an option has intrinsic value. The price of the underlying asset is higher than the strike price in the case of a call option and lower than the strike price in the case of a put option. Thus the option may be exercised profitably
At the money options: Where the market price of an underlying asset equals the strike price of an options contract
Out of the money options: where an option has no intrinsic value. Thus the price of the underlying asset is lower than the strike price in the case of a call option and high than the strike price in the case of put options. Thus the option contact cannot be exercised profitably