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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. The vast majority of options are either European or American (style) options. These options - as well as others where the payoff is calculated similarly - are referred to as "vanilla options". Options where the payoff is calculated differently are categorised as "exotic options". Exotic options can pose challenging problems in valuation and hedging. An option contract is an agreement in which the buyer (holder) has the right (but not the obligation) to exercise by buying or selling an asset at a set price (strike price) on (European style option) or before (American style option) a future date (the exercise date or expiration); and...
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. ...
Option Value In finance, the value of an option consists of two components, its intrinsic value and its time value. ...
In finance, an exotic option is a derivative which has features making it more complex than commonly traded products (vanilla options). ...
Mathematical finance is the branch of applied mathematics concerned with the financial markets. ...
It has been suggested that this article or section be merged into Hedge (finance). ...
American and European options
The key difference between American and European options relates to when the options can be exercised: - A European option may be exercised only at the expiry date of the option, i.e. at a single pre-defined point in time.
- An American option on the other hand may be exercised at any time before the expiry date.
For both, the pay-off - when it occurs - is via: - Max [ (S – K), 0 ], for a call option
- Max [ (K – S), 0 ], for a put option:
(Where K is the Strike price and S is the spot price of the underlying asset) The largest and the smallest element of a set are called extreme values, or extreme records. ...
A call option is a financial contract between two parties, the buyer and the seller of this type of option. ...
A put option (sometimes simply called a put) is a financial contract between two parties, the buyer and the writer of the option. ...
The strike price, or exercise price, is a key variable in a derivatives contract between two parties. ...
Option contracts traded on futures exchanges are mainly American-style, whereas those traded over-the-counter are mainly European. An option contract is defined as a promise which meets the requirements for the formation of a contract and limits the promisors power to revoke an offer. ...
The introduction to this article provides insufficient context for those unfamiliar with the subject matter. ...
Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, or derivatives directly between two parties. ...
Difference in value European options are typically valued using the Black-Scholes or Black model formula. This is a simple equation with a closed-form solution that has become standard in the financial community. There are no general formulae for American options, but a choice of models to approximate the price are available (for example Whaley, binomial options model, and others - there is no consensus on which is preferable). However, a semi-closed exact formula for the price of American puts has been recently published by Song-Ping Zhu. 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. ...
The Black model (sometimes known as the Black-76 model) is a variant the Black-Scholes option pricing model. ...
In finance, the binomial options model provides a generalisable numerical method for the valuation of options. ...
American options are rarely exercised early. This is because any option has a non-negative time value and is usually worth more unexercised. Owners who wish to realise the full value of their option will mostly prefer to sell it on, rather than exercise it immediately, sacrificing the time value. Option Value In finance, the value of an option consists of two components, its intrinsic value and its time value. ...
Where an American and a European option are otherwise identical (having the same strike price, etc.), the American option will be worth at least as much as the European (which it entails). If it is worth more, then the difference is a guide to the likelihood of early exercise. In practice, one can calculate the Black-Scholes price of a European option that is equivalent to the American option (except for the exercise dates of course). The difference between the two prices can then be used to calibrate the more complex American option model. The strike price, or exercise price, is a key variable in a derivatives contract between two parties. ...
Calibration is the determination, by measurement or comparison with a standard, of the correct value of each reading on a measuring instrument. ...
To account for the American's higher value there must be some situations in which it is optimal to exercise the American option before the expiration date. This can arise in several ways, such as:
- A deep ITM currency option (FX option) where the strike currency has a lower interest rate than the currency to be received will often be exercised early because the time value sacrificed is less valuable than the expected depreciation of the received currency against the strike.
- A put option on gold will be exercised early when deep ITM, because gold tends to hold its value where as the currency used as the strike is often expected to lose value through inflation if the holder waits until final maturity to exercise the option (they will almost certainly exercise a contract deep ITM, minimizing its time value).
In finance, moneyness is a measure of the degree to which a derivative security is likely to have positive monetary value at its expiration. ...
A call option is a financial contract between two parties, the buyer and the seller of this type of option. ...
This article does not cite its references or sources. ...
Look up dividend in Wiktionary, the free dictionary. ...
A bond option is similar to a stock option with the difference that the underlying asset is a bond. ...
Dirty Price A bond price that includes accrued interest. ...
In finance, a bond is a debt security, in which the issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity. ...
A convertible bond is type of bond that can be converted into shares of stock in the issuing company, usually at some pre-announced ratio. ...
In marketing a coupon is a ticket or document that can be exchanged for a financial discount or rebate when purchasing a product. ...
A put option (sometimes simply called a put) is a financial contract between two parties, the buyer and the writer of the option. ...
GOLD refers to one of the following: GOLD (IEEE) is an IEEE program designed to garner more student members at the university level (Graduates of the Last Decade). ...
Non-Vanilla Exercise Rights There are other, more unusual exercise styles in which the pay-off value remains the same as a standard option (as in the classic American and European options above) but where early exercise occurs differently: - A Bermudan option is an option where the buyer has the right to exercise at a set (always discretely spaced) number of times. This is intermediate between a European option--which allows exercise at a single time, namely expiry--and an American option, which allows exercise at any time (the name is a pun: Bermuda is between America and Europe). For example a typical Bermudan swaption might confer the opportunity to enter into an interest rate swap. The option holder might decide to enter into the swap at the first exercise date (and so enter into, say, a ten-year swap) or defer and have the opportunity to enter in six months time (and so enter a nine-year and six-month swap). Most exotic interest rate options are of Bermudian style.
- A Canary option is an option whose exercise style lies somewhere between European options and Bermudan options. (The name is a pun on the relative geography of the Canary Islands.) Typically, the holder can exercise the option at quarterly dates, but not before a set time period (typically one year) has elapsed. The term was coined by Keith Kline, who at the time was an agency fixed income trader at the Bank of New York.
- A capped-style option is not an interest rate cap but a conventional option with a pre-defined profit cap written into the contract. A capped-style option is automatically exercised when the underlying security closes at a price making the option's mark to market match the specified amount.
- A compound option is an option on another option, and as such presents the holder with two separate exercise dates and decisions. If the first exercise date arrives and the 'inner' option's market price is below the agreed strike the first option will be exercised (European style), giving the holder a further option at final maturity.
- A shout option allows the holder effectively two exercise dates: during the life of the option they can (at any time) "shout" to the seller that they are locking-in the current price, and if this gives them a better deal than the pay-off at maturity they'll use the underlying price on the shout date rather than the price at maturity to calculate their final pay-off.
- A swing option gives the purchaser the right to exercise one and only one call or put on any one of a number of specified exercise dates (this latter aspect is Bermudan). Penalties are imposed on the buyer if the net volume purchased exceeds or falls below specified upper and lower limits. Allows the buyer to "swing" the price of the underlying asset. Primarily used in energy trading.
To meet Wikipedias quality standards, this article or section may require cleanup. ...
In the field of derivatives, a popular form of swap is the interest rate swap, in which one party exchanges a stream of interest for another partys stream. ...
Capital Las Palmas de Gran Canaria and Santa Cruz de Tenerife Official language(s) Spanish Area – Total – % of Spain Ranked 13th 7,447 km² 1. ...
Interest rate cap An interest rate cap is a series of European call options or caplets on a specified interest rate, usually the LIBOR interest rate. ...
In economics, mark to market is the act of assigning a value to a position held in a tradeable financial instrument based on the current market price for that instrument. ...
"Exotic" Options with Standard Exercise Styles These options can be exercised either European style or American style; they differ from the plain vanilla option only in the calculation of their pay-off value: In finance, a vanilla option is a type of derivative security. ...
- A cross option (or composite option) is an option on some underlying in one currency with a strike denominated in another currency. For example a standard call option on IBM, which is denominated in dollars pays $MAX(S-K,0) (where S is the stock price at maturity and K is the strike). A composite stock option might pay £MAX(S/Q-K,0), where Q is the prevailing FX rate. The pricing of such options naturally needs to take into account FX volatilty and the correlation between the exchange rate of the two currencies involved and the underlying stock price.
- A quanto option is a cross option in which the exchange rate is fixed at the outset of the trade, typically at 1. The payoff of an IBM quanto call option would then be £max(S-K,0).
- An exchange option is the right to exchange one asset for another (such as a sugar future for a corporate bond).
- A basket option' is an option on the weighted average of several underlyings
- A rainbow option is a basket option where the weightings depend on the final performances of the components. A common special case is an option on the worst-performing of several stocks.
A call option is a financial contract between two parties, the buyer and the seller of this type of option. ...
The United States dollar is the official currency of the United States. ...
Positive linear correlations between 1000 pairs of numbers. ...
In finance, a bond is a debt security, in which the issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity. ...
Non-vanilla path dependent "exotic" options The following "exotic options" are still options, but have payoffs calculated quite differently from those above. Although these instruments are far more unusual they can also vary in exercise style (at least theoretically) between European and American: In finance, an exotic option is a derivative which has features making it more complex than commonly traded products (vanilla options). ...
- A lookback option is a path dependent option where the option owner has the right to buy (sell) the underlying instrument at its lowest (highest) price over some preceding period.
- An Asian option is an option where the payoff is not determined by the underlying price at maturity but by the average underlying price over some pre-set period of time. For example an Asian call option might pay MAX(DAILY_AVERAGE_OVER_LAST_THREE_MONTHS(S) - K, 0).
- A Russian option is a lookback option which runs for perpetuity. That is, there is no end to the period into which the owner can look back.
- A game option or Israeli option is an option where the writer has the opportunity to cancel the option he has offered, but must pay the payoff at that point plus a penalty fee.
- The payoff of a Parisian option is dependent of the amount of time the option has spent above or below a strike price.
- A barrier option involves a mechanism where if a price is crossed by the underlying, the option either can be exercised or can no longer be exercised.
- A binary option (also known as a digital option) pays a fixed amount, or nothing at all, depending on the price of the underlying instrument at maturity.
- A chooser option gives the purchaser a fixed period of time to decide whether the derivative will be a vanilla call or put.
A process is said to be path-dependent if accidental events might have a persistent effect on its course. ...
A barrier option is a type of financial option where the option to exercise depends on the underlying crossing or reaching a given barrier level. ...
A binary option is a type of option where the payoff is either some fixed amount of some asset or nothing at all. ...
Related Payoffs and profits from buying stock and writing a call. ...
In finance, moneyness is a measure of the degree to which a derivative security is likely to have positive monetary value at its expiration. ...
A naked put is a put option where the option writer does not have a short position in the stock. ...
An option contract is an agreement in which the buyer (holder) has the right (but not the obligation) to exercise by buying or selling an asset at a set price (strike price) on (European style option) or before (American style option) a future date (the exercise date or expiration); and...
Option Value In finance, the value of an option consists of two components, its intrinsic value and its time value. ...
A put option (sometimes simply called a put) is a financial contract between two parties, the buyer and the writer of the option. ...
In financial mathematics, put-call parity defines a relationship between the price of a European call option and a European put option - both with the identical strike price and expiry. ...
See also The Chicago Board Options Exchange (CBOE) is one of the worlds largest options exchanges with an annual trade of over 15 billion shares of stock options in some 1200 companies. ...
Derivatives traders at the Chicago Board of Trade. ...
The derivatives markets are the financial markets for derivatives. ...
Financial economics is the branch of economics concerned with resource allocation over time. ...
Financial instruments package financial capital in readily tradeable forms - they do not exist outside the context of the financial markets. ...
Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. ...
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. ...
An option screener is a tool that evaluates options based on criteria and generates a list of potential trading ideas. ...
Options A binary option is a type of option where the payoff is either some fixed amount of some asset or nothing at all. ...
A bond option is similar to a stock option with the difference that the underlying asset is a bond. ...
In finance, a default option or credit default option is a put option that makes a payoff in the event the issuer of a specified reference asset defaults. ...
An interest rate derivate is a derivative security where the underlying asset is the right to pay or receive a (usually notional) amount of money at a given interest rate. ...
In finance, a foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. ...
// Interest rate cap An interest rate cap is a derivative in which the buyer receives money at the end of each period in which an interest rate exceeds the agreed strike price. ...
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 real option is the right, but not the obligation, to undertake some business decision, typically the option to make a capital investment. ...
Main article: Option A stock option is a specific type of option that uses the stock itself as an underlying instrument to determine the options pay-off (and therefore its value). ...
To meet Wikipedias quality standards, this article or section may require cleanup. ...
For other uses of the term Warrant, see Warrant (disambiguation) A warrant is a security that entitles the holder to buy or sell a certain additional quantity of an underlying security. ...
External links - Nasdaq definition of the two basic styles of options; note site says the capped-style option is no longer traded.
- option types data base, global-derivatives.com
- Derivatives Calculators, Derivativesone.com
- Online Exotic Option Calculators, sitmo.com
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