An option traded on a regulated exchange where the terms of each option are standardized by the exchange. The contract is standardized so that underlying asset, quantity, expiration date and strike price are known in advance. Over-the-counter options are not traded on exchanges and allow for the customization of the terms of the option contract.Exchange-traded options are also known as "listed options". The benefits to exchange-traded options are the liquidity of the options, standardized contracts, quick access to prices and the use of clearing houses by exchanges. The use of clearing houses guarantees the option contract will be fulfilled, while with over-the-counter options the ability to exercise the contract is dependent on the ability of the other party to meet the obligation.
An option that can only be exercised at the end of its life, at its maturity. European options tend to sometimes trade at a discount to its comparable American option. This is because American options allow investors more opportunities to exercise the contract. European options normally trade over the counter, while American options usually trade on standardized exchanges. A buyer of an European option that does not want to wait for maturity to exercise it can sell the option to close the position.
A bank guarantee that an option writer has the underlying security on deposit and that the underlying security is readily available for delivery if the option is exercised. The use of escrow accounts and receipts provides further evidence and security that the securities are available to complete the transaction.
A derivative instrument with underlying assets based on equity securities. An equity derivative's value will fluctuate with changes in its underlying asset's equity, which is usually measured by share price. Investors can use equity derivatives to hedge the risk associated with taking a position in stock by setting limits to the losses incurred by either a short or long position in a company's shares. The investor receives this insurance by paying the cost of the derivative contract, which is referred to as a premium. If an investor purchases a stock, he or she can protect against a loss in share value by purchasing a put option. On the other hand, if the investor has shorted shares, he or she can hedge against a gain in share price by purchasing a call option.Options are the most common equity derivatives because they directly grant the holder the right to buy or sell equity at a predetermined value. More complex equity derivatives include equity index swaps, convertible bonds or stock index futures.
A relatively new form of derivative contract (the first ones were traded in 2002) that is based on the future value of some national economic indicator, such as non-farm payrolls, the purchasing manager's index, retail sales levels and the gross domestic product. Most of these economic derivatives are in the form of binary or "digital" options, whereby the only payout options are full payout (in the money) or nothing at all (out of the money). Other types of contracts currently traded include capped vanilla options and forwards.Economic derivatives have become attractive for their ability to mitigate some of the market and basis risks found in standard investment vehicles. For example, a binary option trading on the GDP would pay its face value if, when the official GDP release is made (the exercise date), the GDP value falls within a specific range (strike range). If the GDP figure is outside of this range, the option expires worthless. By looking at the implied probabilities of different outcomes, economists and investors can compare economic derivatives to Wall Street estimates and look for discrepancies between the two estimations. As might be expected, the market-driven process seen in derivatives pricing has shown itself to be the more consistently accurate predictor of future indicator release values.
When an option or other security is exercised prior to its maturity date. European options don't allow early exercise, whereas American-style options do.
An electronically traded futures contract on the Chicago Mercantile Exchange that represents a portion of the normal futures contracts. E-mini contracts are available on a wide range of indexes such as the Nasdaq 100, S&P 500, S&P MidCap 400 and Russell 2000. For example, the E-mini S&P 500 futures contract is one-fifth the size of the standard S&P 500 futures contract. Advantages to trading E-mini contracts include liquidity, greater affordability for individual investors and around-the-clock trading.
The rate at which the vega of an option or warrant will change over time. DvegaDtime is the second order derivative of the value of the option - once to volatility (vega) and once to time. DvegaDtime is part of the group of measures known as the "Greeks" (other measures include delta, gamma and vega) which are used in options pricing models such as the Black-Scholes. When looking to express DvegaDtime for a single day, investors should divide by 36,500 (or 25,200 if calculating for trading days). This is different than charm or color, which are divided by 365 to obtain the daily value. Unlike many of the other "Greeks", DvegaDtime does not have a Greek letter associated with it.
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