1. For a call, when an option's strike price is higher than the market price of the underlying asset. 2. For a put, when the strike price is below the market price of the underlying asset. Watch: Out Of The Money Options Basically, an option that would be worthless if it expired today.
Exotic options traded on the over-the-counter market, where participants can choose the characteristics of the options traded. The flexibility of these options is attractive to many. With OTC options, both hedgers and speculators can benefit from avoiding the restrictions that normal standardized exchanges place on options. The flexibility allows participants to achieve their desired position more precisely and cost effectively.
A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date). Call options give the option to buy at certain price, so the buyer would want the stock to go up.Put options give the option to sell at a certain price, so the buyer would want the stock to go down. Options are extremely versatile securities that can be used in many different ways. Traders use options to speculate, which is a relatively risky practice, while hedgers use options to reduce the risk of holding an asset. In terms of speculation, option buyers and writers have conflicting views regarding the outlook on the performance of an underlying security. For example, because the option writer will need to provide the underlying shares in the event that the stock's market price will exceed the strike, an option writer that sells a call option believes that the underlying stock's price will drop relative to the option's strike price during the life of the option, as that is how he or she will reap maximum profit. This is exactly the opposite outlook of the option buyer. The buyer believes that the underlying stock will rise, because if this happens, the buyer will be able to acquire the stock for a lower price and then sell it for a profit.
A committee of representatives from participating exchanges responsible for providing last-sale options quotations and information from the participating exchanges. OPRA divides its services into two main areas: a basic service for all options except foreign currency derivatives and a "FCO service" for foreign currency options information. The organization includes the American Stock Exchange (AMEX), Chicago Board Options Exchange (CBOE), Boston Options Exchange (BOX), International Securities Exchange (ISE), Pacific Exchange (PCX) and Philadelphia Stock Exchange (PHLX).
An option on a futures contract gives the holder the right to enter into a specified futures contract. If the option is exercised, the initial holder of the option would enter into the long side of the contract and would buy the underlying asset at the futures price. A short option on a futures contract lets an investor enter into a futures contract as the short who would be required to sell the underlying asset on the future date at the specified price. Essentially, the futures specified in the option contract allows someone to enter into the specified futures contract when the option expires.
One options contract represents one hundred shares in the underlying stock. The quoted price of an option is per share. The quoted price of a stock option must be multiplied by 100 to get the cost per contract.
A clearing organization that acts as both the issuer and guarantor for option and futures contracts. The Options Clearing Corporation is regulated by both the SEC and the CFTC. The OCC is the largest clearing organization in the world and is owned equally by the American Stock Exchange (AMEX), Chicago Board Options Exchange (CBOE), International Securities Exchange (ISE), Pacific Exchange, and the Philadelphia Stock Exchange (PHLX).
The tendency of a stock's price to close near the strike price of heavily traded options (in the same stock) as the expiration date nears. This doesn't always happen, but it often does when there is significant open interest. For example, if a stock is trading near $50 and there is heavy trading in both puts and calls at this strike price, there is a tendency for the stock price to be "pinned" at $50 as traders unwind their positions at expiration.
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