2 An option whose underlying security is an index. If exercised, settlement is made by cash payment, since physical delivery is not possible.A financial derivative that gives the holder the right, but not the obligation, to buy orsell a basket of stocks, such as the S&P 500, at an agreed-upon price and before acertain date. An index option is similar to other options contracts, the difference beingthe underlying instruments are indexes. Options contracts, including index options,allow investors to profit from an expected market move or to reduce the risk ofholding the underlying instrument.
3 Exchange Traded Options (Options) are a versatile and flexible tool that allow you to employ a range of approaches. Options can be used to complement or refine your existing share strategies, or take advantage of opportunities in ways that owning shares cant. Options can be used to limit risk or to take on risk to profit depending on your approach. Options can be as simple or as complex as you want.
4Options can be used in a variety of ways, depending on the strategy you can: Manage risk in a falling market - lock in your gains or limit losses. Generate additional income without taking on additional risk. Give yourself time to decide - allows you the freedom to decide whether to invest in specific shares, without being committed to a course of action. Potentially profit from any market direction - rising, falling or going sideways. Provides leverage to potentially increase returns .
5 There are two types of Options - Call Options and Put Options. These two options can be bought or sold. They can also be used in combinations to create a variety of strategies suited to your risk tolerance. With options positions its important to look at the implications of holding options positions from both the stand point of the BUYER (or taker) of the option, and the SELLER (or writer) of the option.
Options can be either American-Style Options orEuropean-Style Options and the only difference is thatthe holder of an American style option can exercise theiroption any time before and at expiration of the optioncontract whereas a European option holder can onlyexercise their option on the expiry date of the optioncontract. 6
7CALL OPTION PUT OPTION
CALL OPTION PUT OPTION 8
9Call option • A call option gives you the right to buy within a specified time period at a specified price • The owner of the option pays a cash premium to the option seller in exchange for the right to buy
10Put option • A put option gives you the right to sell within a specified time period at a specified price • It is not necessary to own the asset before acquiring the right to sell it
11The Option PremiumThe price of an option has two components: Intrinsic value: • For a call option equals the stock price minus the striking price • For a put option equals the striking price minus the stock price Time value equals the option premium minus the intrinsic value
12Cont…… • An option with no intrinsic value is out of the money • An option with intrinsic value is in the money • If an option’s striking price equals the stock price, the option is at the money