What are Options?

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What are Options?

An option contract is a contract between two parties wherein the first party (the option writer) confers the second party (the buyer) the right, but not the obligation to buy (Call) or sell (Put) a specific underlying instrument or asset at a specific price(Strike or Exercise Price), until or on a specific future date (Expiration Date). The price paid for this right by the buyer of the option contract to the writer is called the Option Premium.

Option contracts can be classified as to whether they give the holder of the option, the right to buy or to sell the underlying stock. A Call option is a contract giving its holder the right to buy a specified stock from the option writer while a Put option is a contract giving its holder the right to sell a specified stock to the option writer. If the buyer chooses to exercise this right, the seller is obliged to sell or buy the asset at the agreed price. The buyer may choose not to exercise the right and let it expire.

In equity markets, a Call option is the right to buy or sell a specific stock at a specific price for a specific time frame. The price of the option contract is derived from (or depends on) the underlying stock and the option will be the right to buy or sell it. For this reason, option contracts are recognized as derivatives instruments. The underlying asset can be a piece of property, a security (stock or bond), or even another derivative instrument, such as a futures contract.


Return profile for equity investments



 

Return profile with options







Forsa Call Options

A Forsa Call Option is an American Style Option contract between the Option seller (Forsa) and the Option buyer whereby Forsa grants the Option buyer the right, but not the obligation to buy a specified number of shares of a certain stock at a specified price (Strike Price), on or before a specified future date (Expiration Date). To acquire this right, the Option buyer pays Forsa (Option Seller) the Option premium or the Option price. To provide the liquidity necessary for a trading market, the market maker (Forsa) quotes daily ask and bid prices to all options it writes. The Bid is the price quoted by Forsa for buying an option contract and the Ask is the price quoted for selling an option contract.

Call Option

Underlying Stock

Expiration Date

Strike Price

Market Price

Ask Price*

Bid Price*

First

NBK

27-April-2005

1400

1400

56

54

Second

NBK

27-April-2005

1440

1400

38

36

Third

NBK

27-April-2005

1480

1400

25

23

 

* The bid ask spread incorporates the KCC clearing and settlement commission of 3%, the brokerage commission of 2.5% as well as the market makers commission of 5.5%

The Premium for a call option decreases as the market price for the underlying stock rises above the strike price.