DERIVATIVE SEGMENT – 10

IMPORTANT TERMS IN OPTIONS

STRIKE PRICE : It is the price per share for which the underlying security may be purchased or sold by the option holder. For example nifty call and put options strike price
IN THE MONEY OPTION : This option would give holder a positive cash flow , if it were exercised immediately . a call option is said to be ITM , when spot price is higher than strike price . and , put option is said to be ITM when spot price is lower than strike price. In our examples , call option is in the money.
AT THE MONEY OPTION: At the money option would lead to zero cash flow if it were exercised immediately . therefore , for both call and put ATM options strike price is equal to spot price.
OUT OF THE MONEY : Out of the money option is one with strike price worse than the spot price for the holder of option . this option would give the holder a negative cash flow if it were exercised immediately .

INTRINSIC VALUE :Option premium, defined above , consists of two components- intrinsic value and time value . for an option , intrinsic value refers to the amount by which option is in the money , the amount an option buyer will realize , before adjusting for premium paid , if he exercises the option instantly . therefore , only in the money have intrinsic value whereas at the money and out of the money options have zero intrinsic value .
TIME VALUE : It is the difference between premium and intrinsic value , if any of an option . ATM and OTM options will have only value because the intrinsic value of such options is zero
OPEN INTEREST : As discussed in futures section , open interest is the total number of option contracts outstanding for an underlying asset .
EXERCISE OF OPTIONS : In case of American option , buyers can exercise their option any time before the maturity of contract . all these options are exercised with respect to the settlement value/ closing price of the stock on the exercise of option.

Source by –

GOWRISH R BHAT