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Igor
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Everything posted by Igor
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In an inflation swap, there are two parties to the deal. One party transfers the inflation risk, and the other party assumes the inflation risk. One party's assets are linked to a price index and the other party's assets linked to cash flow (which could be fixed or floating).
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Traders who do not find it comfortable trading stocks in the options market can decide to trade the performance of a group of options measured by an index. These options are known as index options.
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It compels the responsible counterparty to reimburse the non-responsible counterparty for all losses and damages that were brought about by the premature termination of the swap.
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Illiquid options are difficult to sell because they are far away from their expiration dates and as such when they are sold, they are sold at a huge discount.
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Also called a calendar spread, this option strategy hopes to take advantage of different moves of the asset at various times. For instance, an asset may be bearish at a certain time, and then bullish thereafter. By using a calendar spread, the trader can benefit from the different conditions for the asset as a result of the different expiry times set for the two sets of options trades.
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Horizontal skews can either be forward skews when volatility increases from near to far months or, reverse skews when volatility decreases from near to far months.
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Options trades are commonly used as hedging transactions to protect trades in the parent markets of the assets traded. Typically, the trade used as a hedge goes in an opposite direction so that a loss in the parent market on that asset will translate into a profit on the trade used as the hedge, cutting down any losses sustained.
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This is a low-risk strategy which aims for getting small returns on the trade on expiry. It is a complicated strategy that is best suited for advanced traders.
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Bond options can be traded using calls and puts, and can be traded just as stocks are traded on the options market.
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Some options pay the option writer a premium on writing the option. This is why some traders prefer to become option writers or grantors.
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The Black's Model was developed by one of the originators of the Black-Scholes Model, and was created as a variation of the Black-Scholes model to be able to allot a value to futures contracts.
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The Black-Scholes option pricing model is an example of a gamma pricing model which is usually applied to a stock option to determine its value, using the price variation of the stock, the time value of money, the strike price and expiry time of the option and the time value.
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The Black's Model was developed by one of the originators of the Black-Scholes Model, and was created as a variation of the Black-Scholes model to be able to allot a value to futures contracts.
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The Black-Scholes option pricing model is an example of a gamma pricing model which is usually applied to a stock option to determine its value, using the price variation of the stock, the time value of money, the strike price and expiry time of the option and the time value.
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Gamma is used as a measure of the inherent volatility of an asset. A very volatile option contract implies a large gamma. A small gamma therefore implies an asset with low inherent volatility.
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Binary options are also called fixed return options because the payout is fixed, and also called "all or none" options because the trader either receives all the money being paid out for a correct trade, or none of the money paid out if the chosen result is wrong.
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The buyer of the Bermuda swaption
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Bermuda options are used in both American and European options. They are cheaper to trade than American options for options buyers because the premiums are lower, while they are more flexible than European options for options sellers.
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The aim of the bear straddle is to profit from a very small price decline of the asset and so collect the premiums on both the short call and short put components of the trade. This trade type is risky as large moves (even to the downside) will cause losses that offset any premiums collected, leading to a losing position.
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This option type will turn a profit when the price of the asset declines. It is usually used in agricultural commodities trading to trade two similar assets, or even the same asset on the two legs.
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The aim of the trade is to benefit from a decline in the price of the asset below the strike price of the short put leg of the option trade. The trader can then profit from the difference in the strike prices multiplied by the number of shares traded in the deal.
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The aim of the bear call spread is to benefit from a fall in the price of the asset below the price at which the call options were sold. The premium on the long call minus the premium on the short call is now collected as profit, which is multiplied by the number of shares traded for the final payout.
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The basket option allows the trader to trade several assets at the same time and under the same conditions. An application of a basket option is when a corporation wants to get exposure to several currencies in a cost-effective manner (i.e. using one option to trade several currencies). The strike price is derived from the weighting of the individual assets in the basket.
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In the binary options market, the equivalent of the barrier option is the Touch/No Touch contract. There are two types of barrier options. The knock-in barrier option (Touch) gives a payout if the price touches the barrier price before expiry. The knock-out option (No Touch) gives a payout if the price of the asset does not touch the barrier before trade expiry.
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What happens with a balloon option is that instead of getting a payout of a dollar for dollar amount for every price increase of the asset, the payout increases for every dollar price increase of the asset in a pre-determined ratio. So if a balloon option is traded with a pre-set threshold of $60 and the price increases by say $2 to $62, then the payout may be $1.5 for every extra $1 gain.
