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 ).