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
Broadcom co-founder takes stand in fraud trial
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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Monetary gain and high-risk tactics stimulate activity in the brain
Medicine & Health / Psychology & Psychiatry
Nov 17, 2009 |
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Monetary gain stimulates activity in the brain. Even the mere possibility of receiving a reward is known to activate an area of the brain called the striatum. A team of Japanese researchers report in the January 2010 issue ...
Churchill Downs buying YouBet.com
Nov 12, 2009 |
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Churchill Downs Inc., owner of the horse racing track which hosts the famed Kentucky Derby, announced it has agreed to acquire online betting website YouBet.com.
Facebook creates dual-class structure, but no IPO
Nov 24, 2009 |
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(AP) -- Facebook has created a dual-class stock structure designed to give founder Mark Zuckerberg and other existing shareholders control over the company.
Lenovo buying back mobile phone business
Nov 27, 2009 |
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(AP) -- Personal computer maker Lenovo Group said Friday it is joining the race to develop products that link phones and PCs by buying back a mobile phone business that it sold last year.
Cisco raises bid for Tandberg to $3.4 billion
Nov 16, 2009 |
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(AP) -- Cisco Systems Inc. said Monday it raised its bid for Norway's Tandberg ASA after only a fraction of Tandberg shareholders agreed to Cisco's initial offer.
It's time for a 'third wave' of malaria activism to tackle drug shortages
Nov 24, 2009 |
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In this week's PLoS Medicine, the journal's editors call for concerted international action to address the crisis of malaria drug shortages across Africa.
2009: the Year of Twitter
Nov 30, 2009 |
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The year has not yet ended but Microsoft says "Twitter" was among the top searches of 2009 on its new search engine Bing and a company which monitors language has crowned it the top word of the year.
Microsoft, Yahoo take next step in search alliance
Dec 05, 2009 |
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(AP) -- Microsoft Corp. and Yahoo Inc. have signed off on their plan to team up against Google Inc. in the lucrative Internet search market.
AOL going public after Time Warner divorce
Dec 09, 2009 |
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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.
Nvidia, AMD shares jump after Intel scraps chip
Dec 07, 2009 |
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(AP) -- Shares of Nvidia Corp. and Advanced Micro Devices Inc. jumped Monday after rival Intel Corp. scrapped plans to make a new graphics chip that would have challenged both companies.
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