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Igor
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Everything posted by Igor
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The backspread can be executed using call or put options, and has unlimited profit potential while the loss potential is limited. An example of a backspread option is the ratio backspread option.
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Compound options usually have a call and put component, with one option being exercised for the purchase of the other. The back fee is the premium that is charged on the second round of the option.
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The extrinsic value of an asset declines as its date of expiration draws closer. It is the value of an asset that is assigned to it by external determinants.
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A company in the US may decide to pay 20,000 euros monthly to a company in Europe for raw materials at an agreed exchange rate. If at the end of the time interval for the option, the average of the monthly payments is less favourable than the strike price of the option trade, then the US company will receive a payment for the differential from the option issuer.If the average rate is found to be less desirable than the strike price, the hedging party receives the payment of the differential from the option issuer. No payments are made if the average rates are more favourable.
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This is used as a hedging strategy. As an example, if a trader purchased an average price put contract of 1,000 barrels of crude when the product is $70 with a view to benefit from falling prices, and the price on expiration is $63, then the average price put payout will be ($70 - $63) X 1,000 barrels = $7,000 (less commissions payable on the trade. If the price on expiration was say $73, then the payout for the trade is zero.
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This is used as a hedging strategy. As an example, if a trader purchased an average price put contract of 1,000 barrels of crude when the product is $70 with a view to benefit from rising prices, and the price on expiration is $75, then the average price put payout will be ($75 - $70) X 1,000 barrels = $5,000 (less commissions payable on the trade). If the price on expiration was say $67, then the payout for the trade is zero.
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This can be likened to the use of either a Trailing Stop or a Take Profit target, which automatically closes trades which are in profit under different conditions. A trader who is not close to his computer or who has a very busy schedule may decide to use the automatic exercise to close trades which are in the money without manual intervention.
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The Atlantic ocean divides America from Europe, hence the name of the option. The aim of this option type is to be able to close out an option before expiry if it becomes profitable, so as to prevent time decay on the asset and also to be able to monetize an option faster, using the American leg of the option.
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If the option expires "at-the-money", then the option will attract no payout. In the binary options market, an at-the-money trade will receive no payout and the trade capital is returned to the trader's account.
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The AFBD was founded in 1984 to provide regulatory function over its futures and options dealer members in the London jurisdiction. The AFBD later merged with the Securities Association in 1991 and was later incorporated into the then Financial Services Authority (now Financial Conduct Authority). -
Option trades confer a right to the option buyer or seller to sell or buy back the option. When this is done, then we say the option has been "exercised".
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In the options and futures markets, there are contracts that have to be settled with physical delivery of the items being traded (especially commodities). When these contracts mature, the brokerage or clearing houses then have to get the sellers of these contracts to deliver the physical assets to the buyers of the contracts for proper settlement.
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The payout structure of an asset-or-nothing put option is based on a fixed amount which is only paid when the trade ends in the money at the time of expiry.
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The payout structure of an asset-or-nothing call option is different from a regular vanilla option in that the payout is not calculated based on the difference between the asset price and the strike price, but rather on a fixed amount on expiration of the contract.
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The Asian tail can be likened to the option market's equivalent of the stop loss in forex.
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This is also known as an average value option, and it is useful when the trader wants to protect his trade from the effects of undue price volatility, and also to reduce cost (as they are cheaper than American or European options).
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As an example, a trader in Canada may want to purchase commodity options on corn from a farmer in Chicago, but is worried that in the coming days before the trade is to be settled, the currency of the transaction (US dollars) may gain value over the CAD. He then assumes a long position on the US Dollar to offset any effect the USD gain will have on his option trade (i.e. hedge against a USD gain causing him to pay more for the options transaction). This is an anticipatory hedge.
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The coupon payout of the annapurna option is not guaranteed, but depends on whether the worst performing asset in the options basket falls below the benchmark rate of return or not, as well as the extent of any such falls in price. If it takes longer for the worst performer to hit the price floor, the coupon payout is higher. If it takes lesser time to do this, the coupon payment is lower.
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The American option is also known as the variable return option. It is a useful type of option if the trader intends to take profits as they come in the options market.
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The coupon payout of the altiplano option is guaranteed, but the vanilla-option payout component of the option will only be paid if the basket of options outperforms the benchmark rate of return for the lifetime of the option. They are usually traded by hedge funds and institutional investors.
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Alligator spreads are usually created by the trader engaging a large number of call and put options in a trade platform where the broker charges large commissions. Avoiding the effects of an alligator spread can be achieved by using a broker whose commissions are not large enough to swallow profitable spreads.
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The agreement value method has a provision for compensating a counterparty if they were not responsible for the premature end of the swap by making allowance for the use of a replacement swap. This replacement swap may provide different terms and conditions from the original swap to cater for changes in market conditions.
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If a trader has 2 options contracts that are valued at a strike price of $5, then the aggregate exercise price is $5 X 200 units = $1,000. Usually the calculation does not include any premiums received or incurred on the trade.
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Whenever certain adjustments are made to an underlying asset such as a stock split or a share recontruction, the strike price of the options contract must be adjusted to reflect the new reality. Furthermore, coupon rates on Gannie May mortgages differ from the benchmark rate. Therefore the strike price must be adjusted so that the investor can receive the same returns on them. The term may also refer to the strike price of a security following adjustment for stock splits.
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It is an exotic option which is more complex than simple vanilla options, taking several factors into consideration for the trader to be able to make the decision after the option has been purchased rather than at the time the option was purchased.