Options Contract Example Explained
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ScribdTranslationsOptions Contract Example Explained
Translated by
ScribdTranslationsEXAMPLE OF AN OPTIONS CONTRACT
The option is a contract between two investors Conditions of the example
which consists of granting one of the parties the
ACTION A
right to buy or sell an asset in a
MARKET VALUE TODAY $12
fixed term and at a previously agreed price FIRST $1.00
agreed. Exercise Price $15
EXPIRATION FEBRUARY
OPTION TO PURCHASE
Buyer
The investor buys a call option for stock A at $15 until the expiration date.
(third Friday of February). For that option, he paid a premium of $1.00.
2) If at maturity the stock A has a market price of $20, the investor who bought
the purchase option is exercised and acquires shares A at a value of $15 able to
sell them the same day in the market for a price of $20. In that operation, the investor earns
$5 for the option exercise minus $1 for the premium paid to acquire the right.
3) If at maturity stock A has a market price of $10, the investor who bought
the option to buy is not exercising the option as it will not buy the shares at $15 when
in the market they are at $10. For the operation, he paid a premium of $1 per share which is the
loss that will occur for not exercising the
option.
The expectation of the investor who buys
The investor can sell the option a purchase option is that the market
acquired in the period prior to will rise in order to exercise their option and
expiration in the market. The price of the win with the price difference.
the bond for which the investor paid $1 can Similarly, with the rise of the market
be superior or inferior according to the offer and the the price of the premium will rise so
demand that exists in the market. The you can sell the previous option at
variation of the premium price in the expiration and likewise obtain a
positive result.
market is correlated with the
variation of the stock price
corresponding.
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Seller or launcher
The investor launches a call option of
The expectation of the investor who launches a
the action A at $15 until the date of
purchase option is that the market
expiration (third Friday of February).
will go down.
For that option, he charged a premium of $1.00.
If we take into account that your investment in
2) If at maturity the share A has a actions are medium-term and expect
price in the market of $20, the investor a temporary drop in the market, the
the launcher wins the bonus during the period
who has the option to buy will exercise it,
of the option launch, to the same
therefore the pitcher must sell to him
time that maintains its actions in
shares at $15 per share. In that
portfolio in a recessionary period in the
operation the launcher earned $1 per bonus price of its stock.
charged more (or less) the result between
the price at which the underlying stock was originally purchased and the price at which it should have
sell it for the exercise.
3) If at maturity the stock A has a market price of $10, the investor who has the
The option buyer does not exercise the option. The option writer earned $1 from the premium.
charged and keeps its shares in the portfolio since the option was not exercised.
SALE OPTION
Buyer
The investor buys a selling option the
The expectation of the investor who buys
action A at $15 until the date of
a selling option is that the market
expiration (third Friday of February). For
will lower.
that option paid a premium of $1.00. In this way, you can exercise your option and
2) If at maturity the stock A has a to gain with the price difference between the
price at which the share was acquired and the
market price of $10, the investor
price at which it can be sold with the
who bought the put option exercises it and
exercise.
sells his shares for $15 when in the
Likewise, with the market downturn
market is at $10. In that operation the
the price of the premium will increase so
investor earns $5 for exercising the you can sell the option prior to
option less $1 for the premium he bought expiration and likewise obtain a
to acquire the right. positive result.
3) If at maturity the stock A has a market price of $20, the investor who bought
the seller does not exercise the option as they will not sell the shares at $15 when
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the market is at $20. For the operation, he paid a premium of $1 per share which is the
loss that will be incurred by not exercising the option.
4) The investor can sell the acquired option in the period prior to expiration in the
market. The price of the premium for which the investor paid $1 may be higher or lower.
according to the supply and demand in the market. The variation of the premium price
in the market is correlated with the variation of the corresponding stock price.
Seller or launcher
The investor issues a put option for stock A at $15 until the expiration date.
(third Friday of February). For that option, he received a premium of $1.00.
2) If at maturity the stock A has a market price of $10, the investor who has the
The seller will exercise the sale option, therefore the issuer must buy the shares at $15.
action. In that operation, the seller made $1 for each option sold but lost the amount that
It arises from the difference between the exercise price at which the stock had to be purchased and the
market price at which it can sell
that action at that moment. The expectation of someone who launches an option of
sale means that the market will rise.
3) If at maturity the stock A has a
market price of $20, the investor In this way, he/she charges the premium for the
that has the option to sell does not exercise it launching the option and does not have to
the option. The option writer earned $1 buy the shares at the agreed price in the
option.
for the premium charged.
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