Hello, Dinks. How many active investors do we have with us today? I know some of you deal with options on a weekly basis. Everyone doesn’t deal with them, though. A lot of people may not be entirely sure what they are. Today’s post is meant to help people get a better understanding of options.
According to Investopedia, an option is a contract that gives the buyer the right, but not the obligation to buy or sell an underlying asset at a particular price on or before a specified date. Several different types of options can be traded. The main two types are calls and puts. I will go over a few of them including calls and puts below.
Call options are agreements that give the owner the right to buy the underlying assets in the future at an agreed price. Call options are usually used by investors for three primary purposes. They are used for tax management, income generation, and speculation.
Put options are options that sell assets at an agreed price on or before a particular date. They are the opposite of calls.
American style options can be either call or put options. American style options allow option holders to exercise the option at any time before and to include its maturity date. That will increase the value of the option.
European style options can also be calls and puts as well. A European option can be exercised at the expiration date of the option. Those options sometimes trade at a discount.
Exchange traded option
An exchange traded option is an option traded on a regulated exchange where the terms of each option are standardized by the exchange. These types of options are also known as listed options.
Over the counter options
An over the counter option is an option traded off exchange as opposed to a listed stock option. The OTC option has a direct link between the buyer and seller. They have no secondary market and no expiration dates. They are less accessible to the general public.
Employee stock options
This is something that I’m finally familiar with on this list. Employee stock options are a form of stock option where employees are granted contracts based on the stock of the company they work for. A lot of businesses used these plans to compensate, retain and attract employees. In a previous job, I had a couple of stock options.
Cash settled options
Cash settled options are options are option contracts where the settlement is done with the payment of money equal to the difference between the market value and the contractual value of the underlier at the time of exercise or expiration.
The last option that I will be going over today is called an exotic option. It differs from the American or European options in terms of the underlying asset of the calculation of how or where the investor receives a certain payoff. A lot of exotic options are available from OTC markets.
Have you invested in options before?