Put and call option

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					Put and call option




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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.

				
DOCUMENT INFO
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