Option (finance)
hideIn finance, an option is a contract between a buyer and a seller that gives the buyer the right—but not the obligation—to buy or to sell a particular asset (the underlying asset) at a later day at an agreed price. In return for granting the option, the seller collects a payment (the premium) from the buyer. A call option gives the buyer the right to buy the underlying asset; a put option gives the buyer of the option the right to sell the underlying asset. If the buyer chooses to exercise this right, the seller is obliged to sell or buy the asset at the agreed price. The buyer may choose not to exercise the right and let it expire. The underlying asset can be a piece of property, or shares of stock or some other security, such as, among others, a futures contract. For example, buying a call option provides the right to buy a specified quantity of a security at a set agreed amount, known as the '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.
The theoretical value of an option can be evaluated according to several models. These models, which are developed by quantitative analysts, attempt to predict how the value of the option will change in response to changing conditions. Hence, the risks associated with granting, owning, or trading options may be quantified and managed with a greater degree of precision, perhaps, than with some other investments. 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. 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.
For more information about Option (finance), read the full article at
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News tagged with stock options
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Dec 08, 2009 |
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(AP) -- Broadcom Corp.'s co-founder took the witness stand Tuesday in the fraud trial of the company's former chief financial officer.
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Panasonic Corp. announced Thursday it had secured a controlling stake in smaller rival Sanyo Electric Co. in a 4.6-billion-dollar takeover that revamps Japan's troubled electronics industry.
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(AP) -- AOL resumed life as an independent Internet company Thursday as it completed its spinoff from Time Warner Inc. and closed the book on one of the most disastrous business combinations in history.
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Electronics / Consumer & Gadgets
19 hours ago |
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Apple Inc. is on track to launch a much-anticipated, tablet-sized computing device early next year, according to brokerage reports Wednesday.
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AOL finalized its divorce from Time Warner on Wednesday, ending one of the most disastrous marriages in corporate history and leaving the Internet pioneer facing an uncertain future.
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Dec 07, 2009 |
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