Options Basics¶
1. Exercise Price (Strike Price):¶
The price at which the underlying asset can be bought or sold if the option is exercised. - Call Option: Benefits if the market price exceeds the strike price. - Put Option: Benefits if the market price falls below the strike price.
2. Expiration Date:¶
The last date on which the option can be exercised. After this date, the option becomes worthless. - Short-term options: Valid for days or weeks. - Long-term options: Valid for months or years (e.g., LEAPS - Long-term Equity Anticipation Securities).
3. Pay-off from Options:¶
Payoff depends on the type of option and the underlying asset price at expiration.
- Call Option Payoff:
- If \( S_T > K \), Payoff = \( S_T - K \)
-
If \( S_T \leq K \), Payoff = \( 0 \)
-
Put Option Payoff:
- If \( S_T < K \), Payoff = \( K - S_T \)
- If \( S_T \geq K \), Payoff = \( 0 \)
Where: - \( S_T \): Underlying asset price at expiration - \( K \): Strike price
Example: - A call option with a strike price of $100 and expiration price of $120 has a payoff of \( 120 - 100 = $20 \). - A put option with a strike price of $100 and expiration price of $90 has a payoff of \( 100 - 90 = $10 \).
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