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 ).