30 lines
1.9 KiB
Plaintext
30 lines
1.9 KiB
Plaintext
at-the-money (ATM). If the stock price is below the strike price the call is
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out-of-the-money (OTM). This relationship is just the opposite for puts. If
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the stock price is below the strike price, the put is in-the-money. If the stock
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price and the strike price are about the same, the put is at-the-money. And,
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if the stock price is above the put strike, it is out-of-the-money.
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Option Type
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There are two types of options: calls and puts. Calls give the holder the
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right to buy the underlying and the writer the obligation to sell the
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underlying. Puts give the holder the right to sell the underlying and the
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writer the obligation to buy the underlying.
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Premium
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The price of an option is called its premium. The premium of this option is
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$5. Like stock prices, option premiums are stated in dollars and cents per
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share. Since the option represents 100 shares of IBM, the buyer of this
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option will pay $500 when the transaction occurs. Certain types of spreads
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may be quoted in fractions of a penny.
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An option’s premium is made up of two parts: intrinsic value and time
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value. Intrinsic value is the amount by which the option is in-the-money.
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For example, if IBM stock were trading at 171.30, this 170-strike call
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would be in-the-money by 1.30. It has 1.30 of intrinsic value. The
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remaining 3.70 of its $5 premium would be time value.
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Options that are out-of-the-money have no intrinsic value. Their values
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consist only of time premium. Sometimes options have no time value left.
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Options that consist of only intrinsic value are trading at what traders call
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parity . Time value is sometimes called premium over parity .
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Exercise Style
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One contract specification that is not specifically shown here is the exercise
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style. There are two main exercise styles: American and European.
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American-exercise options can be exercised, and therefore assigned,
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anytime after the contract is entered into until either the trader closes the |