Financial markets

Bond market Fixed income Corporate bond Government bond Municipal bond Bond valuation High-yield debt This article does not cite any references or sources. ... Download high resolution version (480x640, 110 KB)Blockade in front of NYSE. Picture taken in April 2004. ... The bond market, also known as the debit, credit, or fixed income market, is a financial market where participants buy and sell debt securities usually in the form of bonds. ... This article does not cite any references or sources. ... A corporate bond is a bond issued by a corporation. ... A government bond is a bond issued by a national government denominated in the countrys own currency. ... In the United States, a municipal bond (or muni) is a bond issued by a state, city or other local government, or their agencies. ... Bond valuation is the process of determining the fair price of a bond. ... In finance, a high yield bond (non-investment grade bond, speculative grade bond or junk bond) is a bond that is rated below investment grade at the time of purchase. ...

Stock market Stock Preferred stock Common stock Registered share Voting share Stock exchange A stock market or (equity market) is a private or public market for the trading of company stock and derivatives of company stock at an agreed price; both of these are securities listed on a stock exchange as well as those only traded privately. ... For other uses, see Stock (disambiguation). ... Preferred stock, also called preferred shares or preference shares, is typically a higher ranking stock than voting shares, and its terms are negotiated between the corporation and the investor. ... Common stock, also referred to as common shares, are, as the name implies, the most usual and commonly held form of stock in a corporation. ...

Foreign exchange market The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. ...

Derivatives market Credit derivative Hybrid security Options Futures Forwards Swaps The derivatives markets are the financial markets for derivatives. ... // A credit derivative is a financial instrument or derivative (finance) whose price and value derives from the creditworthiness of the obligations of a third party, which is isolated and traded. ... Definition A hybrid security, as the name implies, is a security that combines two or more different financial instruments. ... In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ... A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time. ... For the Thoroughbred horse racing champion, see: Swaps (horse). ...

Other Markets Commodity market Money market OTC market Real estate market Spot market Chicago Board of Trade Futures market Commodity markets are markets where raw or primary products are exchanged. ... This article is about short-term financing. ... Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. ... Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings. ... Template:The Spot Market The Spot Market or Cash Marketis a commodities or securities market in which goods are sold for cash and delivered immediately. ...

Finance series Financial market Financial market participants Corporate finance Personal finance Public finance Banks and Banking Financial regulation The field of finance refers to the concepts of time, money and risk and how they are interelated. ... This article does not cite any references or sources. ... There are two basic financial market participant catagories, Investor vs. ... Domestic credit to private sector in 2005 Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. ... -1... This article does not cite any references or sources. ... For other uses, see Bank (disambiguation). ... Financial supervision is government supervision of financial institutions by regulators. ...

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Options are financial instruments that convey the right, but not the obligation, to engage in a future transaction on some underlying security, or in a futures contract. In other words, the holder does not have to exercise this right, unlike a forward or future. However worthy of note is the fact that on the expiration date of an option the OCC Option Clearing House will automatically convert any option which expires $.01 in the money. In other words if you are the holder of a security option which expires in the money by .01 cent at expiration you will automatically receive the stock and be expected to pay for it. A simple note stating otherwise to broker prior to expiration will keep this from happening. For example, buying a call option provides the right to buy a specified quantity of a security at a set strike price at some time on or before expiration, while buying a put option provides the right to sell. Upon the option holder's choice to exercise the option, the party who sold, or wrote, the option must fulfill the terms of the contract.^[1][2] In finance, financial markets facilitate: The raising of capital (in the capital markets); The transfer of risk (in the derivatives markets); and International trade (in the currency markets). ... == Stock Options == wiktionarypar|option}} An option is the right, but not the obligation, to do something. ... In finance, an underlying is an investment from which a derivative security is derived. ... For security (collateral), the legal right given to a creditor by a borrower, see security interest A security is a fungible, negotiable instrument representing financial value. ... In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ... A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time. ... In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ... OCC can mean any of the following: Old Corrugated Containers Osborne Computer Corporation Office of the Comptroller of the Currency Officer Candidates Class Orange County Choppers Orange Coast College Occupational Character Class (in the Palladium Rifts RPG) Options Clearing Corporation (the issuer and registered clearing facility for all United States... This article is about financial options. ... The strike price, or exercise price, is a key variable in a derivatives contract between two parties. ... For an option contract, expiration is the date on which the contract expires. ... A put option (sometimes simply called a put) is a financial contract between two parties, the buyer and the writer of the option. ... The owner of an option contract may exercise it, indicating that the financial transaction specified by the contract is to be enacted immediately between the two parties, and the contract itself is terminated. ...

The theoretical value of an option can be determined by a variety of techniques. These models, which are developed by quantitative analysts, can also predict how the value of the option will change in the face of changing conditions. Hence, the risks associated with trading and owning options can be understood and managed with some degree of precision compared to some other investments. Robert C. Merton, a pioneer of quantitative analysis, introduced stochastic calculus into the study of finance. ... For the Parker Brothers board game, see Risk (game) For other uses, see Risk (disambiguation). ... In finance, a trader is someone who buys and sells financial instruments such as stocks, bonds and derivatives. ...

Exchange-traded options form an important class of options which have standardized contract features and trade on public exchanges, facilitating trading among independent parties. Over-the-counter options are traded between private parties, often well-capitalized institutions, that have negotiated separate trading and clearing arrangements with each other. Another important class of options, particularly in the U.S., are employee stock options, which are awarded by a company to their employees as a form of incentive compensation. Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. ... An employee stock option is a call option on the common stock of a company, issued as a form of non-cash compensation. ...

Other types of options exist in many financial contracts, for example real estate options are often used to assemble large parcels of land, and prepayment options are usually included in mortgage loans. However, many of the valuation and risk management principles apply across all financial options. In law, an option is the right to convey a piece of property. ... Prepayment is repayment (anticipation) of the total loan amount by a property owner whos mortgage is backing a Mortgage Backed Security (MBS). ... This article is about the legal mechanism used to secure property in favor of a creditor. ...

Contract specifications

Every financial option is a contract between the two counterparties with the terms of the option specified in a term sheet. Option contracts may be quite complicated; however, at minimum, they usually contain the following specifications:^[3] A term sheet is a bullet-point document outlining the material terms and conditions of a business agreement. ...

• whether the option holder has the right to buy (a call option) or the right to sell (a put option)
• the quantity and class of the underlying asset(s) (e.g. 100 shares of XYZ Co. B stock)
• the strike price, also known as the exercise price, which is the price at which the underlying transaction will occur upon exercise
• the expiration date, or expiry, which is the last date the option can be exercised
• the settlement terms, for instance whether the writer must deliver the actual asset on exercise, or may simply tender the equivalent cash amount
• the terms by which the option is quoted in the market, usually a multiplier such as 100, to convert the quoted price into actual premium amount

This article is about financial options. ... A put option (sometimes simply called a put) is a financial contract between two parties, the buyer and the writer of the option. ... In finance, an underlying is an investment from which a derivative security is derived. ... The strike price, or exercise price, is a key variable in a derivatives contract between two parties. ... The owner of an option contract may exercise it, indicating that the financial transaction specified by the contract is to be enacted immediately between the two parties, and the contract itself is terminated. ... For an option contract, expiration is the date on which the contract expires. ... Settlement (of securities) is the process whereby securities or interests in securities are delivered, usually against payment, to fulfill contractual obligations, such as those arising under securities trades. ...

Types of options

The primary types of financial options are:

• 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 credit of the exchange. Since the contracts are standardized, accurate pricing models are often available. Exchange traded options include:^[4][5]

1. stock options,
2. commodity options,
3. bond options and other interest rate options
4. index (equity) options, and
5. options on futures contracts

• Over-the-counter 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:

1. interest rate options
2. currency cross rate options, and
3. options on swaps or swaptions.

• Employee stock options are issued by a company to its employees as compensation.

Derivatives traders at the Chicago Board of Trade. ... A clearing house (or clearinghouse) is an organization affiliated with a securities or derivatives exchange that completes the transactions on that exchange by seeing to validation, delivery, and settlement. ... A bond option is similar to a stock option with the difference that the underlying asset is a bond. ... To meet Wikipedias quality standards, this article may require cleanup. ... Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. ... Swap can refer generically to the exchanging of one thing for another; see also Barter. ... To meet Wikipedias quality standards, this article or section may require cleanup. ... Employee stock options are stock options for the companys own stock that are often offered to upper-level employees as part of the executive compensation package, especially by American business corporations. ...

Option styles

Main article: Option style

Naming conventions are used to help identify properties common to many different types of options. These include: In finance, the style or family of an option is a general term denoting the class into which the option falls, usually defined by the dates on which the option may be exercised. ...

• European option - an option that may only be exercised on expiration.
• American option - an option that may be exercised on any trading day on or before expiration.
• Bermudan option - an option that may be exercised only on specified dates on or before expiration.
• Barrier option - any option with the general characteristic that the underlying security's price must reach some trigger level before the exercise can occur.

The owner of an option contract may exercise it, indicating that the financial transaction specified by the contract is to be enacted immediately between the two parties, and the contract itself is terminated. ... For an option contract, expiration is the date on which the contract expires. ...

Valuation models

Main article: Valuation of options

The value of an option can be estimated using a variety of quantitative techniques based on the concept of risk neutral pricing and using stochastic calculus. The most basic model is the Black-Scholes model. More sophisticated models are used to model the volatility smile. These models are implemented using a variety of numerical techniques.^[6] In general, standard option valuation models depend on the following factors: Option contracts are complex to value. ... In economics, the term risk neutral is used to describe an individual who values risk at a constant value. ... Stochastic calculus is a branch of mathematics that operates on stochastic processes. ... The Black-Scholes model, often simply called Black-Scholes, is a model of the varying price over time of financial instruments, and in particular stocks. ... In finance, the volatility smile is a long-observed pattern in which at-the-money options tend to have lower implied volatilities than other options. ...

• The current market price of the underlying security,
• the strike price of the option, particularly in relation to the current market price of the underlier (in the money vs. out of the money),
• the cost of holding a position in the underlying security, including interest and dividends,
• the time to expiration together with any restrictions on when exercise may occur, and
• an estimate of the future volatility of the underlying security's price over the life of the option.

More advanced models can require additional factors, such as an estimate of how volatility changes over time and for various underlying price levels, or the dynamics of stochastic interest rates. The strike price, or exercise price, is a key variable in a derivatives contract between two parties. ... For an option contract, expiration is the date on which the contract expires. ... Volatility most frequently refers to the standard deviation of the change in value of a financial instrument with a specific time horizon. ...

The following are some of the principal valuation techniques used in practice to evaluate option contracts.

Black Scholes

Main article: Black Scholes

The Black-Scholes model was the first quantitative technique to comprehensively and accurately estimate the price for a variety of simple option contracts. By employing the technique of constructing a risk neutral portfolio that replicates the returns of holding an option, Fischer Black and Myron Scholes produced a closed-form solution for a European option's theoretical price.^[7] At the same time, the model generates hedge parameters necessary for effective risk management of option holdings. While the ideas behind Black-Scholes were ground-breaking and eventually led to a Nobel Prize in Economics for Myron Scholes and Robert Merton, the application of the model in actual options trading is clumsy because of the assumptions of continuous (or no) dividend payment, constant volatility, and a constant interest rate. Nevertheless, the Black-Scholes model is still widely used in academic work, and for many financial applications where the model's error is within margin of tolerance.^[8] The Black–Scholes model is a model that posits that a stock price evolves according to geometric Brownian motion and that there is a well defined risk free instrument that pays a constant interest rate. ... Fischer Black (1938 - August 30, 1995) was an American economist, best known as one of the authors of the famous Black-Scholes equation. ... Myron S. Scholes (born July 1, 1941) is one of the authors of the famous Black-Scholes equation. ... The Greeks redirects here. ... The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, commonly called the Nobel Prize in Economics, is a prize awarded each year for outstanding intellectual contributions in the field of economics. ... Myron S. Scholes (born July 1, 1941) is one of the authors of the famous Black-Scholes equation. ... Robert C. Merton (born July 31, 1944), a leading scholar in the field of finance, was one of three men who, in the early 1970s, developed the mathematics of the stock options markets. ...

Stochastic volatility models

Main article: Heston model

Since the market crash of 1987, it has been observed that market implied volatility for options of lower strike prices are typically higher than for higher strike prices, suggesting that volatility is stochastic, varying both for time and for the price level of the underlying security. Stochastic volatility models have been developed including one developed by S.L. Heston.^[9] One principal advantage of the Heston model is that it can be solved in closed-form, while other stochastic volatility models require complex numerical models.^[9] The introduction to this article provides insufficient context for those unfamiliar with the subject matter. ... In financial mathematics, the implied volatility of an option contract is the volatility implied by the market price of the option based on an option pricing model. ... Stochastic volatility models are used in the field of quantitative finance to evaluate derivative securities, such as options. ... The introduction to this article provides insufficient context for those unfamiliar with the subject matter. ...

Model implementation

Once a valuation model has been chosen, there are a number of different techniques used to take the mathematical models to implement the models.

Analytic techniques

In some cases, one can take the mathematical model and using analytic methods develop closed form solutions. The resulting solutions are useful because they are rapid to calculate.

Binomial tree pricing model

Main article: Binomial options pricing model

Closely following the derivation of Black and Scholes, John Cox, Stephen Ross and Mark Rubinstein developed the original version of the binomial options pricing model.^{[10] [11]} It models the dynamics of the option's theoretical value for discrete time intervals over the option's duration. The model starts with a binomial tree of discrete future possible underlying stock prices. By constructing a riskless portfolio of an option and stock (as in the Black-Scholes model) a simple formula can be used to find the option price at each node in the tree. This value can approximate the theoretical value produced by Black Scholes, to the desired degree of precision. However, the binomial model is considered more accurate than Black-Scholes because it is more flexible, e.g. discrete future dividend payments can be modeled correctly at the proper forward time steps, and American options can be modeled as well as European ones. Binomial models are widely used by professional option traders. In finance, the binomial options pricing model provides a generalisable numerical method for the valuation of options. ... John C. Cox is a professor of finance at the MIT Sloan School of Management. ... Stephen A. Ross is the Franco Modigliani Professor of Finance and Economics at the MIT Sloan School of Management. ... Mark Rubinstein is the Paul Stephens Professor of Applied Investment Analysis at the Haas School of Business at the University of California, Berkeley. ... In finance, the binomial options pricing model provides a generalisable numerical method for the valuation of options. ...

Monte Carlo models

Main article: Monte Carlo model

For many classes of options, traditional valuation techniques are intractable due to the complexity of the instrument. In these cases, a Monte Carlo approach may often be useful. Rather than attempt to solve the differential equations of motion that describe the option's value in relation to the underlying security's price, a Monte Carlo model determines the value of the option for a set of randomly generated economic scenarios. The resulting sample set yields an expectation value for the option. Monte Carlo methods are a class of computational algorithms for simulating the behavior of various physical and mathematical systems. ...

Finite difference models

The equations used to value options can often be expressed in terms of partial differential equations, and once expressed in this form, a finite different model can be derived. In mathematics, a partial differential equation (PDE) is a relation involving an unknown function of several independent variables and its partial derivatives with respect to those variables. ...

Other models

Other numerical implementations which have been used to value options include finite element methods. Mathematically, the finite element method (FEM) is used for finding approximate solution of partial differential equations (PDE) as well as of integral equations such as the heat transport equation. ...

Risks

As with all securities, trading options entails the risk of the option's value changing over time. However, unlike traditional securities, the return from holding an option varies non-linearly with the value of the underlier and other factors. Therefore, the risks associated with holding options are more complicated to understand and predict.

In general, the change in the value of an option can be derived from Ito's lemma as: In mathematics, Itōs lemma is used in stochastic calculus to find the differential of a function of a particular type of stochastic process. ...

where the greeks Δ, Γ, κ and θ are the standard hedge parameters calculated from an option valuation model, such as Black-Scholes, and dS, dσ and dt are unit changes in the underlier price, the underlier volatility and time, respectively. The Black-Scholes model, often simply called Black-Scholes, is a model of the varying price over time of financial instruments, and in particular stocks. ...

Thus, at any point in time, one can estimate the risk inherent in holding an option by calculating its hedge parameters and then estimating the expected change in the model inputs, dS, dσ and dt, provided the changes in these values are small. This technique can be used effectively to understand and manage the risks associated with standard options. For instance, by offsetting a holding in an option with the quantity − Δ of shares in the underlier, a trader can form a delta neutral portfolio that is hedged from loss for small changes in the underlier price. The corresponding price sensitivity formula for this portfolio Π is: In finance, a portfolio containing options is delta neutral when it consists of positions with offsetting positive and negative deltas (exposure to changes in the value of the underlying instrument), and these balance out to bring the net delta of the portfolio to zero. ...

Example

A call option expiring in 99 days on 100 shares of XYZ stock is struck at $50, with XYZ currently trading at $48. With future realized volatility over the life of the option estimated at 25%, the theoretical value of the option is $1.89. The hedge parameters Δ, Γ, κ, θ are (0.439, 0.0631, 9.6, and -0.022), respectively. Assume that on the following day, XYZ stock rises to $48.5 and volatility falls to 23.5%. We can calculate the estimated value of the call option by applying the hedge parmeters to the new model inputs as:

Under this scenario, the value of the option increases by $0.0614 to $1.9514, realizing a profit of $6.14. Note that for a delta neutral portfolio, where by the trader had also sold 44 shares of XYZ stock as a hedge, the net loss under the same scenario would be ($15.81).

Pin risk

Main article: Pin risk

A special situation called pin risk can arise when the underlier closes at or very close to the option's strike value on the last day the option is traded prior to expiration. The option writer (seller) may not know with certainty whether or not the option will actually be exercised or be allowed to expire worthless. Therefore, the option writer may end up with a large, unwanted residual position in the underlier when the markets open on the next trading day after expiration, regardless of their best efforts to avoid such a residual. Pin risk occurs when the underlier of an option contract settles close to the options strike value at expiration. ... Pin risk occurs when the underlier of an option contract settles close to the options strike value at expiration. ...

Counterparty risk

A further, often ignored, risk in derivatives such as options is counterparty risk. In an option contract this risk is that the seller won't sell or buy the underlying asset as agreed. The risk can be minimized by using a financially strong intermediary able to make good on the trade, but in a major panic or crash the number of defaults can overwhelm even the strongest intermediaries.

Trading

The most common way to trade options is via standardized options contracts that are listed by various futures and options exchanges. ^[12] Listings and prices are tracked and can be looked up by ticker symbol. By publishing continuous, live markets for option prices, an exchange enables independent parties to engage in price discovery and execute transactions. As an intermediary to both sides of the transaction, the benefits the exchange provides to the transaction include: The introduction to this article provides insufficient context for those unfamiliar with the subject matter. ... An option symbol is a code by which options are identified on a futures exchange. ...

• fulfillment of the contract is backed by the credit of the exchange, which typically has the highest rating (AAA),
• counterparties remain anonymous,
• enforcement of market regulation to ensure fairness and transparency, and
• maintenance of orderly markets, especially during fast trading conditions.

Over-the-counter options contracts are not traded on exchanges, but instead between two independent parties. Ordinarily, at least one of the counterparties is a well-capitalized institution. By avoiding an exchange, users of OTC options can narrowly tailor the terms of the option contract to suit individual business requirements. In addition, OTC option transactions generally do not need to be advertised to the market and face little or no regulatory requirements. However, OTC counterparties must establish credit lines with each other, and conform to each others clearing and settlement procedures. In investment, the credit rating assesses the credit worthiness of a corporations debt issues. ... Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. ...

With few exceptions,^[13] there are no secondary markets for employee stock options. These must either be exercised by the original grantee or allowed to expire worthless. The secondary market (also called aftermarket) is the financial market for trading of securities that have already been issued in its initial private or public offering. ... Employee stock options are stock options for the companys own stock that are often offered to upper-level employees as part of the executive compensation package, especially by American business corporations. ...

The basic trades of traded stock options

These trades are described from the point of view of a speculator. If they are combined with other positions, they can also be used in hedging.

Payoffs and profits from a long call.

Image File history File links CallOption. ... Image File history File links CallOption. ...

Long Call

A trader who believes that a stock's price will increase might buy the right to purchase the stock (a call option) rather than just buy the stock. He would have no obligation to buy the stock, only the right to do so until the expiration date. If the stock price at expiration is above the exercise price by more than the premium paid, he will profit. If the stock price at expiration is lower than the exercise price, he will let the call contract expire worthless, and only lose the amount of the premium. A trader might buy the option instead of shares, because for the same amount of money, he can obtain a much larger number of options than shares. If the stock rises, he will thus realize a larger gain than if he had purchased shares. This article is about financial options. ...

Long Put

Payoffs and profits from a long put.

A trader who believes that a stock's price will decrease can buy the right to sell the stock at a fixed price (a put option). He will be under no obligation to sell the stock, but has the right to do so until the expiration date. If the stock price at expiration is below the exercise price by more than the premium paid, he will profit. If the stock price at expiration is above the exercise price, he will let the put contract expire worthless and only lose the premium paid. Image File history File links PutOption. ... Image File history File links PutOption. ... A put option (sometimes simply called a put) is a financial contract between two parties, the buyer and the writer of the option. ...

Short Call

Payoffs and profits from a naked short call.

A trader who believes that a stock price will decrease, can sell the stock short or instead sell, or "write," a call. The trader selling a call has an obligation to sell the stock to the call buyer at the buyer's option. If the stock price decreases, the short call position will make a profit in the amount of the premium. If the stock price increases over the exercise price by more than the amount of the premium, the short will lose money, with the potential loss unlimited. Image File history File links CallWrite. ... Image File history File links CallWrite. ...

Short Put

Payoffs and profits from a naked short put.

A trader who believes that a stock price will increase can buy the stock or instead sell a put. The trader selling a put has an obligation to buy the stock from the put buyer at the put buyer's option. If the stock price at expiration is above the exercise price, the short put position will make a profit in the amount of the premium. If the stock price at expiration is below the exercise price by more than the amount of the premium, the trader will lose money, with the potential loss being up to the full value of the stock. Image File history File links PutWrite. ... Image File history File links PutWrite. ...

Option strategies

Main article: Option strategies

Payoffs from buying a butterfly spread.

Payoffs from selling a straddle.

Payoffs from a covered call.

Combining any of the four basic kinds of option trades (possibly with different exercise prices and maturities) and the two basic kinds of stock trades (long and short) allows a variety of options strategies. Simple strategies usually combine only a few trades, while more complicated strategies can combine several. An option strategy is implemented by combining one or more option positions and possibly an underlying stock position. ... Image File history File links No higher resolution available. ... Image File history File links No higher resolution available. ... Image File history File links No higher resolution available. ... Image File history File links No higher resolution available. ... Image File history File links Download high resolution version (931x638, 46 KB) Summary I made this myself and release it into the public domain. ... Image File history File links Download high resolution version (931x638, 46 KB) Summary I made this myself and release it into the public domain. ...

Strategies are often used to engineer a particular risk profile to movements in the underlying security. For example, buying a butterfly spread (long one X1 call, short two X2 calls, and long one X3 call) allows a trader to profit if the stock price on the expiration date is near the middle exercise price, X2, and does not expose the trader to a large loss.

An Iron condor is a strategy that is similar to a butterfly spread, but with different strikes for the short options - offering a larger likelihood of profit but will a lower net credit compared to the butterfly spread.

Selling a straddle (selling both a put and a call at the same exercise price) would give a trader a greater profit than a butterfly if the final stock price is near the exercise price, but might result in a large loss. In finance, a straddle is an investment strategy involving the purchase or sale of particular option derivatives that allows the holder to profit based on how much the price of the underlying security moves, regardless of the direction of price movement. ...

Similar to the straddle is the strangle which is also constructed by a call and a put, but whose strikes are different, reducing the net debit of the trade, but also reducing the likelihood of profit in the trade. In finance, a strangle is an investment strategy involving the purchase or sale of particular option derivatives that allows the holder to profit based on how much the price of the underlying security moves, with relatively minimal exposure to the direction of price movement. ...

One well-known strategy is the covered call, in which a trader buys a stock (or holds a previously-purchased long stock position), and sells a call. If the stock price rises above the exercise price, the call will be exercised and the trader will get a fixed profit. If the stock price falls, the trader will lose money on his stock position, but this will be partially offset by the premium received from selling the call. Overall, the payoffs match the payoffs from selling a put. Payoffs and profits from buying stock and writing a call. ...

Historical uses of options

Contracts similar to options are believed to have been used since ancient times. In the real estate market, call options have long been used to assemble large parcels of land from separate owners, e.g. a developer pays for the right to buy several adjacent plots, but is not obligated to buy these plots and might not unless he can buy all the plots in the entire parcel. Film or theatrical producers often buy the right — but not the obligation — to dramatize a specific book or script. Lines of credit give the potential borrower the right — but not the obligation — to borrow within a specified time period. Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings. ... A line of credit is a type of credit in which a bank undertakes to provide credit to a client during a predefined period. ...

Many choices, or embedded options, have traditionally been included in bond contracts. For example many bonds are convertible into common stock at the buyer's option, or may be called (bought back) at specified prices at the issuer's option. Mortgage borrowers have long had the option to repay the loan early, which corresponds to a callable bond option. For alternative meanings, see bond (a disambiguation page). ... A convertible bond, or convertible debenture, is a type of bond that can be converted into shares of stock in the issuing company, usually at some pre-announced ratio. ... This article is about the legal mechanism used to secure property in favor of a creditor. ...

In London, puts and "refusals" (calls) first became well-known trading instruments in the 1690s during the reign of William and Mary.^[14] Events Giovanni Domenico Cassini observes differential rotation within Jupiters atmosphere. ... William III Mary II The phrase William and Mary usually refers to the joint sovereignty over the Kingdom of England and the Kingdom of Scotland of King William III and his wife Queen Mary II. Their joint reign began in February, 1689, when they were called to the throne by...

Privileges were options sold over the counter in nineteenth century America, with both puts and calls on shares offered by specialized dealers. Their exercise price was fixed at a rounded-off market price on the day or week that the option was bought, and the expiry date was generally three months after purchase. They were not traded in secondary markets.

See also

• American Stock Exchange
• Chicago Board Options Exchange
• Eurex
• Euronext.liffe
• International Securities Exchange
• NYSE Arca
• Philadelphia Stock Exchange
• LEAPS (finance)
• Real options analysis

The American Stock Exchange (AMEX) is an American stock exchange situated in New York. ... The Chicago Board Options Exchange (CBOE), located at 400 South LaSalle Street in Chicago, is one of the worlds largest options exchanges with an annual trade of over 450 million options contracts, covering more than 1200 companies, 50 stock indexes, and 50 exchange-traded funds (ETFs). ... Eurex is a major futures and options exchange for European benchmark derivatives featuring open and low-cost electronic access globally. ... Euronext. ... ISE BACKGROUND International Securities Exchange Holdings, Inc. ... NYSE Arca, previously known as ArcaEx is an entirely online stock exchange. ... The Philadelphia Stock Exchange (PHLX) is the oldest stock exchange in the United States. ... In corporate finance, real options analysis applies put option and call option valuation techniques to capital budgeting decisions. ...

References

Richard A. Brealey is a special adviser to the Governor of the Bank of England and Visiting Professor of Finance at the London Business School. ... Stewart C. Myers is the Gordon Y Billard Professor of Finance at the MIT Sloan School of Management. ... Year 2007 (MMVII) was a common year starting on Monday of the Gregorian calendar in the 21st century. ... is the 172nd day of the year (173rd in leap years) in the Gregorian calendar. ... Year 2007 (MMVII) was a common year starting on Monday of the Gregorian calendar in the 21st century. ... is the 172nd day of the year (173rd in leap years) in the Gregorian calendar. ... Year 2007 (MMVII) was a common year starting on Monday of the Gregorian calendar in the 21st century. ... is the 172nd day of the year (173rd in leap years) in the Gregorian calendar. ... John C. Cox is a professor of finance at the MIT Sloan School of Management. ... Stephen A. Ross is the Franco Modigliani Professor of Finance and Economics at the MIT Sloan School of Management. ... Mark Rubinstein is the Paul Stephens Professor of Applied Investment Analysis at the Haas School of Business at the University of California, Berkeley. ... The Journal of Financial Economics or JFE, is a publication in the theory of financial economics. ... John C. Cox is a professor of finance at the MIT Sloan School of Management. ... Mark Rubinstein is the Paul Stephens Professor of Applied Investment Analysis at the Haas School of Business at the University of California, Berkeley. ... Year 2006 (MMVI) was a common year starting on Sunday of the Gregorian calendar. ... is the 346th day of the year (347th in leap years) in the Gregorian calendar. ... Year 2007 (MMVII) was a common year starting on Monday of the Gregorian calendar in the 21st century. ... is the 170th day of the year (171st in leap years) in the Gregorian calendar. ...

Further reading

Business press and web sites

• Callan Associates. A Review of the CBOE S&P 500 BuyWrite Index (BXM). (October 2006).
• Optiontradingpedia.com
• An excellent collection of free option trading tools, strategy simulator and much more. OptionPundit is one of the best option trading related financial websites.
• Clary, Isabelle. "Wall Street Spreading the Word on Options -- Derivative Instruments Now Being Pushed as Source of Better Returns, not Just for Hedging." Pensions & Investments. (February 19, 2007).
• Hadi, Mohammed. "Buy-Write Strategy Could Help in Sideways Market." Wall Street Journal. (April 29, 2006) pg. B5.
• Tan, Kopin, "Yield Boost -- Firms Market Covered-call Writing to Up Returns." Barron's, (Oct. 25, 2004).
• Tergesen, Anne. "Taking Cover with Covered Calls." Business Week, (May 21, 2001), pp. 132.
• Michael C. "Getting Started in Options" Wiley, 2007; www.michaelthomsett.com
• Options News Network launches ONN.tv
• Investment Bank Option Trader's Blog

Academic literature

• Fischer Black and Myron S. Scholes. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, 81 (3), 637-654 (1973).
• Feldman, Barry and Dhuv Roy. "Passive Options-Based Investment Strategies: The Case of the CBOE S&P 500 BuyWrite Index." The Journal of Investing, (Summer 2005).
• Kleinert, Hagen, Path Integrals in Quantum Mechanics, Statistics, Polymer Physics, and Financial Markets, 4th edition, World Scientific (Singapore, 2004); Paperback ISBN 981-238-107-4 (also available online: PDF-files)
• Hill, Joanne, Venkatesh Balasubramanian, Krag (Buzz) Gregory, and Ingrid Tierens. "Finding Alpha via Covered Index Writing." Financial Analysts Journal. (Sept.-Oct. 2006). pp. 29-46.
• Moran, Matthew. “Risk-adjusted Performance for Derivatives-based Indexes – Tools to Help Stabilize Returns.” The Journal of Indexes. (Fourth Quarter, 2002) pp. 34 – 40.
• Reilly, Frank and Keith C. Brown, Investment Analysis and Portfolio Management, 7th edition, Thompson Southwestern, 2003, pp. 994-5.
• Schneeweis, Thomas, and Richard Spurgin. "The Benefits of Index Option-Based Strategies for Institutional Portfolios" The Journal of Alternative Investments, (Spring 2001), pp. 44 - 52.
• Whaley, Robert. "Risk and Return of the CBOE BuyWrite Monthly Index" The Journal of Derivatives, (Winter 2002), pp. 35 - 42.
• Bloss, Michael; Ernst, Dietmar; Häcker Joachim (2008): Derivatives - An authoritative guide to derivatives for financial intermediaries and investors Oldenbourg Verlag München ISBN 978-3-486-58632-9

Hagen Kleinert, Photo taken in 2006 Hagen Kleinert is Professor of Theoretical Physics at the Free University of Berlin, Germany (since 1968), Honorary Professor at the Kyrgyz-Russian Slavic University, and Honorary Member of the Russian Academy of Creative Endeavors. ... Year 2004 (MMIV) was a leap year starting on Thursday of the Gregorian calendar. ...

External links

• List of equities with options
• Standard types of options