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In finance, the expiration date of an option contract (represented by Greek letter tau, τ) is the last date on which the holder of the option may exercise it according to its terms. [1] In the case of options with "automatic exercise", the net value of the option is credited to the long and debited to the short position holders.
In general, equity call options should only be exercised early on the day before an ex-dividend date, and then only for deep in-the-money options. For an American-style put option, early exercise is a possibility for deep in-the-money options. In this case, it may make sense to exercise the option early in order to obtain the intrinsic value (K ...
A compound option is an option on another option, and as such presents the holder with two separate exercise dates and decisions. If the first exercise date arrives and the 'inner' option's market price is below the agreed strike the first option will be exercised (European style), giving the holder a further option at final maturity.
The options trader makes a profit of $200, or the $400 option value (100 shares * 1 contract * $4 value at expiration) minus the $200 premium paid for the call.
Reward/risk: In this example, the put breaks even when the stock closes at option expiration at $19 per share, or the strike price minus the $1 premium paid. Below $20 the put increases in value ...
For an out-of-the-money option, the further in the future the expiration date—i.e. the longer the time to exercise—the higher the chance of this occurring, and thus the higher the option price; for an in-the-money option the chance of being in the money decreases; however the fact that the option cannot have negative value also works in the ...
At expiration, usually either the option is in the money, and the seller has bought or sold enough of the underlier to satisfy his obligation under the option contract, or; the option is out of the money, and the option will expire worthless, and the seller of the option would have no position in the underlier.
For a European option, there is no option of early exercise, and the binomial value applies at all nodes. For an American option, since the option may either be held or exercised prior to expiry, the value at each node is: Max (Binomial Value, Exercise Value). For a Bermudan option, the value at nodes where early exercise is allowed is: Max ...