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Main article: Option In finance, an option is a contract whereby one party (the holder or buyer) has the right but not the obligation to exercise a feature of the contract (the option) on or before a future date (the exercise date or expiry). ...
A stock option is a specific type of option that uses the stock itself as an underlying instrument to determine the option's pay-off (and therefore its value). Thus it is a contract to buy (known as a "call option") or sell (known as a "put option") a certain number of shares of stock, at a predetermined or calculable (from a formula in the contract) price. In finance, an option is a contract whereby one party (the holder or buyer) has the right but not the obligation to exercise a feature of the contract (the option) on or before a future date (the exercise date or expiry). ...
In financial terminology, stock is the capital raised by a corporation, through the issuance and sale of shares. ...
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 seller of the option. ...
In financial terminology, stock is the capital raised by a corporation, through the issuance and sale of shares. ...
Valuation | Example | | Suppose I own an option to buy a share in XYZ Corp. for $100 in one month's time. If the actual stock price at the time is $105, then I would exercise (i.e., use) my option and buy the stock for $100 from whomever sold me the option. I could then either keep the stock, or sell it in the open market for $105, making a profit of $5. In economics, the Open Market is the term used to refer to the environment in which bonds are bought and sold. ...
However, if, in one month's time the stock price was only $95, I would not exercise my option, for if I really wanted a share in XYZ Corp., I could buy it in the open market for $95 rather than using my option to buy it for $100.
Thus if I own an option, I might make a profit but am certain not to make a loss, except for the cost of the option itself. The principle of no arbitrage therefore implies that an option must have some positive monetary value itself. In economics, arbitrage is the practice of taking advantage of a state of imbalance between two or more markets: a combination of matching deals are struck that exploit the imbalance, the profit being the difference between the market prices. ...
| A stock option contract's value is determined by five principal factors:- - The price of the stock,
- The strike price,
- The cumulative cost required to hold a position in the stock (including interest + dividends),
- The time to expiration,
- The estimate of the future volatility of the stock price.
For large corporations in economies such as the United States, there is a liquid market in put and call options for certain expiry dates and certain strikes close to the current stock price. Thus for those contracts valuation is given "by the market". For other contracts, with different strikes and different expiries the market price can be used to give an estimate of the future volatility, which in turn can be used in models such as the binomial options model (for American options) or the Black-Scholes model with volatility smile for European options to value the non-standard contracts. The strike price, or exercise price, is a key variable in a derivatives contract between two parties. ...
In finance, the binomial options model provides a generalisable numerical method for the valuation of options. ...
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. ...
Volatility Smile refers to the long-observed pattern in which at-the-money options tend to have lower implied volatilities than other options. ...
The estimate for future volatility is perhaps the least-known input into any pricing model for options, therefore traders often look to the marketplace to see what the Implied Volatility of an option is -- meaning that given the price of an option and all the other inputs except volatility you can solve for that value.
Trading The most common way to trade stock options is trading standardized options contracts that are listed by various futures and options exchanges -- there are currently six exchanges in the United States that list standardized options contracts based on underlying stocks -- The Philadelphia Stock Exchange (PHLX), American Stock Exchange (AMEX) in New York City, the Pacific Exchange (PCX) in San Francisco, and the Chicago Board Options Exchange (CBOE) which are all open-outcry marketplaces, and the International Securities Exchange (ISE) and Boston Options Exchange (BOX) are electronic marketplaces. In Europe the main exchanges where stock options are traded are Euronext.liffe and Eurex. A futures exchange, or futures and options exchange is a corporation or mutual organization which provides the facilities to trade derivatives such as futures contracts and options. ...
The Philadelphia Stock Exchange (PHLX) is the oldest stock exchange in the United States. ...
The American Stock Exchange (AMEX) is an American stock exchange situated in New York. ...
The Pacific Exchange is a regional stock exchange located in San Francisco, California. ...
The Chicago Board Options Exchange (CBOE) is the worlds largest options exchange with an annual trade of over 15 billion shares of stock options in some 1200 companies. ...
Euronext. ...
Eurex is an European derivatives exchange market. ...
There are also over-the-counter options contracts that are traded not on exchanges, but between two independent parties. At least one of those parties is usually a large financial institution with a balance sheet big enough to underwrite such a contract. Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, or derivatives directly between two parties. ...
Options trading, without intent to ever exercise the option, can be used as a form of leverage. The price of an option on a security will move more than the price of the security itself. For this reason and due to their usefulness in financial engineering, the total value of trading in options has at times exceeded the total value of trading in stocks themselves. Leverage is using given resources in such a way that the potential positive or negative outcome is magnified. ...
Financial engineering is the application of science-based mathematical and statistical models to make a better decision about managing financial risks, investing, borrowing, lending, and saving. ...
In financial terminology, stock is the capital raised by a corporation, through the issuance and sale of shares. ...
Options can also be traded to capture a certain level of volatility on an underlying security.
Employee Stock Options Main article: Employee stock option 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 corporations. ...
Stock options for the company's own stock are often offered to upper-level employees as part of the executive compensation package, especially by American business corporations. It is also sometimes done for non-executive employees, especially in the technology sector, in order to give all employees an incentive to help the company become more profitable. For details see the employee stock option article. Executive compensation is how top executives of business corporations are paid. ...
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 corporations. ...
See also What follows is a list of over 250 Wikipedia articles on finance topics. ...
A derivatives market is any market for a derivative security, that is a contract which specifies the right or obligation to receive or deliver future cash flows based on some future event such as the price of an independent security or the performance of an index. ...
A derivative is a financial contract whose payoffs over time are derived from the performance of assets (such as commodities, shares or bonds), interest rates, exchange rates, or indices (such as a stock market index, consumer price index (CPI) or an index of weather conditions). ...
A bond option is similar to a stock option with the difference that the underlying asset is a bond. ...
A credit derivative is a contract (derivative) to transfer the risk of the total return on a credit asset falling below an agreed level, without transfer of the underlying asset. ...
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. ...
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. ...
For other uses of the term Warrant, see Warrant A warrant is a security that gives the holder the right, but not the obligation, to buy or sell a certain additional quantity of an underlying security at an agreed-upon price. ...
External links - Disk Lectures, Options I audio lecture with slideshow
- Shares and share unlike - 1999 article from The Economist questioning whether investors (as owners) actually gain from large option packages for top management.
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