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Lecture 5 – Mechanics of Options Markets
7 Pages • Partial Study Notes • Year: Pre-2018
Lecture 5 – Mechanics of Options Markets Option: • A contract between two parties giving the buyer the right but not the obligation to trade an underlying asset at a specified price on or before a specified date o Ignoring transaction costs, options trading represents a zero-sum game o Options may result in utility gains through the transfer of risk between the market players, hedgers and speculators Options Players: • Hedgers o Where an option buyer or writer employs an option to reduce risk • Speculators o Where an option buyer or writer uses options primarily to profit Types of Options: • Call o Right to buy • Put o Right to sell • American o Can be exercised any time leading up to expiry • European o Can only be exercised on date of expiry Components of an Exchange Traded Optio
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