A risk that the writer of an options or futures contract faces when the price of the underlying asset closes at or very near the exercise price of the contract upon expiration. This is a very serious risk because if the asset closes at or very near the strike price upon expiration, the options holder could decide to exercise his or her option and the writer could be assigned to the position. For example, say the purchaser of a $30 call wishes to exercise the option to buy the stock if it closes at this price at expiration. If the position is not covered by the writer, he or she will end up with a short position in the stock and all the risks associated with this position. The reverse is true for a put, leaving the options writer in a long position that is potentially going to lose money.
The first securities exchange to be formed in the United States. Created in 1790, the PHLX trades stocks as well as equity, currency, and index options. Their currency options can be either standard or customized.
A non-standard financial option with no fixed maturity and no exercise limit. While the life of a standard option can vary from a few days to several years, a perpetual option (XPO) can be exercised at any time. Perpetual options are considered an American option; European options can be exercised only on the option’s maturity date. Also referred to as "non-expiring options" or "expirationless options." For investors, perpetual options represent the highest ratio of possible risk/reward payoff compared to existing financial products. Perpetual options are viewed as “plain vanilla” options. For many investors they represent an advantage over other instruments (where dividends and/or voting rights are not a high priority) because the strike price on a perpetual option enables the holder to choose the buy or sell price point instead of having to select a singular stock price. In addition, XPOs can be preferable to standard options because they eliminate the expiration risk.
An annuitization-method option with which the annuitant selects a specific time period for which the annuity income payments will last. This is unlike the more commonly selected life option, with which the annuitant receives an income payment for the rest of his or her life, regardless of how long (or short) their retirement years end up lasting. By selecting the period-certain annuitization option, the annuitant is usually able to receive a higher monthly payment than with the life option. This extra income comes with a price though: the risk that the annuity payments will run out before the annuitant's death. For example, say a 65-year-old annuitant decided to start receiving payments from his or her annuity, and chose a 15-year period-certain payout option. This which would provide him or her with a retirement income until the age of 80. Should the annuitant die at or before age 80, this option would not present a problem, but should he or she be expected to live longer than 80 years and not have another source of retirement income, this option could prove too risky.
An exotic option that is valued according to pre-determined price requirements for its underlying asset or commodity. The payoffs associated with these options are determined by the path of the underlying asset's price. Examples include Asian, Barrier and lookback options.
An options strategy that involves the sale of call or put options on stocks that are believed to be overpriced or underpriced. The options are not expected to be exercised. Also referred to as overriding.
A type of covered-call strategy that consists of writing call options on stocks that the writer already owns to generate maximum current income from options premiums and dividends. The covered-call options strategy is achieved either by simultaneously purchasing the shares and writing options (known as a "buy-write") or by writing the options on shares that the writer already owns (the overwrite).Usually an investor with a market opinion of neutral to slightly bullish will employ this option writing strategy.
A measure of the potential dilution to which a common stock's existing shareholders are exposed due to the potential that stock-based compensation will be awarded to executives, directors or key employees of the company. It is usually represented in percentage form and is calculated as stock options granted, plus the remaining options that have yet to be granted divided by the total shares outstanding. There is no precise rule-of-thumb for determining what level of options overhang is bad for investors but, generally speaking, the higher the number, the greater the risk. If a company has a very high options overhang, it must generate even higher levels of growth in order to provide decent returns to investors net of the overhang's dilutive effects on investor returns.
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