Stock options wiki

Option (finance) - Wikipedia

 

stock options wiki

Stock option return calculations provide investors an easy metric for comparing stock option positions. For example, for two stock option positions which appear identical, the potential stock option return may be useful for determining which position has the highest relative potential return. Stock option expensing is a method of accounting for the value of share options, distributed as incentives to employees, within the profit and loss reporting of a listed business. On the income statement, balance sheet, and cash flow statement say that the loss from the exercise is accounted for by noting the difference between the market price (if one exists) of the shares and the cash.


Stock option expensing - Wikipedia


Over-the-counter options[ edit ] 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, the option writer is a well-capitalized institution in order to prevent the credit risk. Option types commonly traded over the counter include: Interest rate options Options on swaps or swaptions, stock options wiki. 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 stock options wiki need to be advertised to the market and face little or no regulatory requirements, stock options wiki. However, OTC counterparties must establish credit lines with each other, and conform to each other's clearing and settlement procedures. With few exceptions, [11] there are no secondary markets for employee stock options. These must either be exercised by the original grantee or allowed to expire.

Exchange trading[ edit ] The stock options wiki common way to trade options is via standardized options contracts that are listed by various futures and options exchanges. 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: Fulfillment of the contract is backed by the credit of the exchange, which typically has the highest rating AAACounterparties remain anonymous, stock options wiki, Enforcement of market regulation to ensure fairness and transparency, stock options wiki, and Maintenance of orderly markets, especially during fast trading conditions.

Basic trades American style [ edit ] 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, stock options wiki.

An option contract in US markets usually represents shares of the underlying security. A trader who expects a stock's price to increase can buy a call option to purchase the stock at a fixed price " strike price " at a later date, rather stock options wiki purchase the stock outright.

The cash outlay on the option is the premium. The trader would have no obligation to buy the stock, stock options wiki, but stock options wiki has the right to do so at or before the expiration date. The risk of loss would be limited to the premium paid, unlike the possible loss had the stock been bought outright, stock options wiki.

The holder of an American-style call option can sell his option holding at any time until the stock options wiki date, and would consider doing so when the stock's spot price is above the exercise price, especially if he expects the price of the option to drop.

By selling the option early in that situation, the trader can realise an immediate profit. Alternatively, he can exercise the option stock options wiki for example, if there is no secondary market for the options — and then sell the stock, realising a profit. A trader would make a profit if the spot price of the shares rises by more than the premium.

For example, if the exercise price is and premium paid is 10, then if the spot price of rises to stock options wiki the transaction is break-even; an increase in stock price above produces a profit. If the stock price at expiration is lower than the exercise price, stock options wiki, the holder of the options at that time will let the call contract expire and only lose the premium or the price paid on transfer.

Long put[ edit ] Payoff from buying a put A trader who expects a stock's price to decrease can buy a put option to sell the stock at a fixed price "strike price" at a later stock options wiki. The trader will be under no obligation to sell the stock, but only has the right to do so at or before the expiration date. If the stock price at expiration is below the exercise price by more than the premium paid, he will make a profit.

If the stock price at expiration is above the exercise price, he will let the put contract expire and only lose the premium paid. In the transaction, the premium also plays a major role as it enhances the break-even point, stock options wiki. For example, if exercise price ispremium paid is 10, then a spot stock options wiki of to 90 is not profitable. He would make a profit if the spot price is below It is important to note that one who exercises a put option, does not necessarily need to own the underlying asset.

Specifically, one does not need to own the underlying stock in order to sell it. The reason for this is that one can short sell that underlying stock. Short call[ edit ] Payoff from writing a call. A stock options wiki who expects a stock's price to decrease can sell the stock short or instead sell, or "write", a call, stock options wiki.

The trader selling a call has an obligation to sell the stock to the call buyer at a fixed price "strike price". If the seller does not own the stock when the option is exercised, he is obligated to purchase the stock from the market at the then market price. If the stock price decreases, the seller of the call call writer will make a profit in the amount of the premium.

If the stock price increases over the strike price by more than the amount of the premium, the seller will lose money, with the potential loss being unlimited. Short put[ edit ] Payoff from writing a put.

A trader who expects a stock's price to increase can buy the stock or instead sell, or "write", a put. The trader selling a put has an obligation to buy the stock from the put buyer at a fixed price "strike price". If the stock price at expiration is above the strike price, the seller of the put put writer will make a profit in the amount of the premium.

If the stock price at expiration is below the strike price by more than the amount of the premium, the trader will lose money, with the potential loss being up to the strike price minus the premium.

 

Stock - Wikipedia

 

stock options wiki

 

Stock option return calculations provide investors an easy metric for comparing stock option positions. For example, for two stock option positions which appear identical, the potential stock option return may be useful for determining which position has the highest relative potential return. Stock option expensing is a method of accounting for the value of share options, distributed as incentives to employees, within the profit and loss reporting of a listed business. On the income statement, balance sheet, and cash flow statement say that the loss from the exercise is accounted for by noting the difference between the market price (if one exists) of the shares and the cash.