Financial Derivative: Options Contracts
Options are an investment that come in two varieties, calls and puts, and can be purchased for a premium per-share price.How do I calculate the option?
Calculating financial options involves using mathematical models to determine the theoretical value of an option contract. You will also want to calculate the option's volatility: Estimate the volatility of the underlying asset based on historical data or implied volatility from options market prices.
What is an Option?
An Option is a contract that allows the holder to buy or sell an asset at a predetermined price, on or before a specified date.
Where can I buy or sell Options?
Options can be bought and sold through online or retail brokers.
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Key Points
Options are a Financial Instrument
Options are a type of derivative security that gives the holder the right (but not the obligation) to buy or sell an underlying asset at a predetermined price, within a specified time frame. They are used by investors to hedge their portfolios, speculate, or generate income.
Options are Traded on a Wide Range of Financial Products
Options are available on a wide range of financial products, including individual stocks, exchange-traded funds, indexes, foreign currencies, and more. These products provide investors with a flexible way to diversify their portfolios and gain exposure to different asset classes.
Options Can Play a Number of Roles in an Investment Portfolio
Options can be used to hedge against losses and to speculate on price movements. They can also be used to generate income by selling options or by buying and selling them in combination with other investments. This gives investors the flexibility to create a portfolio that meets their specific goals and objectives.
Options Require Specific Approval from an Investor's Brokerage Firm
Before trading options, investors must receive approval from their brokerage firm. This approval process ensures that investors understand the risks associated with trading options and are able to make informed decisions based on their specific financial situation.
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