Put and call option Roll:no t521609 Definitions Option: An option gives its holder the right, but not the obligation,to buy or sell a given quantity of an asset on a given date, at prices agreed upon today. Put option The right to sell a given quantity of an asset at some time in the future, at a price agreed upon today. Call option The right to buy a given quantity of some asset at some time in the future, at a price agreed upon today. Important terms Underlying asset: The asset you can buy or sell at expiration. Exercising the option: The act of buying or selling the underlying asset through the option contract. Strike price: The fixed price at which the holder can buy or sell the underlying asset Expirationdate: The last day on which the option may be exercised is called the expiration date(maturity date). Different types of option European options: It can be exercised at maturity only American option: It can be exercised any time before maturity Example of put option Mr. A purchases a put contract to sell 100 shares of their crop.to Mr.B for $50/share.the current price is $55/share, & Mr. A pays a premium of $5/share. If the price of Mr.B’s co.stock falls to 40/share right before expiration,then Mr.A can exercise the put by buying 100 shares for $4000 from the stock market, then selling them to Mr.B for 5000. Example of a call option Mr. A purchases a call contract to buy 100 shares of XYZ crop from Mr.B AT $50/share. The current price is 55 per share, and Mr. A pays a premium of $5/share. If the share price of XYZ stock rises to $60/share right before expiration, then Mr.A can exercise the call by buying 100 shares for $5000 from Mr.B and sell them at $ 6000 in the stock market.