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Revision as of 00:07, 7 July 2005
An option is a contract which gives one party (the purchaser) the right, but not the obligation to execute a specific transaction. The seller of the option is referred to as th writer, who takes on the obligation to fulfill the contract if executed by the purchaser.
Types of Options
Call: An option to purchase or enter in to a long position. For example an IBM 110 call would give the owner the right to purchase IBM from the option writer at 110.
Put: An option to sell or enter in to a short position. For example a Microsoft 50 put would give the owner the right to sell Microsoft to the option writer at 50.
Option pricing is based on several variables, the most important of which is volatility. Some of the models employed are listed below.
The Black-Scholes Model is the most well known of the option pricing models.