Black-Scholes-Merton Model
The Black-Scholes-Merton model is a differential equation used to solve for option prices. The Black-Scholes-Merton model won a noble prize in economics. The standard BSM model is only used to price European options as it does not take into account American options because they can be exercised before maturity. (more…)
Chooser Option
An option contract that allows the holder to decide the nature of the option i.e., whether the option is a call or put before the expiry date is called a Chooser Option. It is an option contract where the holder may choose at some point during the life of the option whether the option is a call or a put. These options have the same strike price and expiry date regardless of it being a call or a put. (more…)
Vega in Options Trading
Vega is the Greek that measures the sensitivity of an option to implied volatility; denoted by the Greek letters. It is the change in the options price for a one-point change in implied volatility. Traders usually refer to the volatility without the decimal point. Options Vega denotes the option’s price sensitivity to changes in the volatility of the underlying asset. It measures how much the option’s price changes in response to a 1% change in the implied volatility of the underlying asset. This article aims to provide an overview of Vega in Options Trading. (more…)
EQUITY DERIVATIVE
An equity derivative is a type of financial instrument. The value of an equity derivative is derived from the price movement of an underlying asset. Investors use equity derivatives to speculate or hedge against the downside of their investment. The hedge to mitigate the risk associated with taking a long position or short position. Equity option and equity index futures are two forms of equity derivatives. A stock option is a good example of an equity derivative because the value of the stock option is based on the price movements of the underlying stock. (more…)
Synthetic Options
Options offer a very low-cost method to invest in with less capital, whether in currencies, trading futures, want to buy shares of a corporation. Options are the most common way to make profits from market swings. Synthetic options generally minimize problems as compared to vanilla options because generally synthetic options are less affected by problems of options. Volatility, decay, and strike price play a less important role in its ultimate outcome. (more…)
Asian options-Benefits and Risks
An Asian option is an option type where the payoff depends on the average price of the underlying asset over a certain period as opposed to standard options where the payoff depends on the price of the underlying asset at a specific point in time that is maturity. (more…)
American options vs European options
An option is a right, but not an obligation to buy(sell) an option that is derived from the underlying asset (Stock, Commodities, Currencies, Indices) at a certain price and a certain date (more…)
Exotic Options
Options are versatile financial products. Options are a type of derivative that derives their value from the value of the underlying asset. An option contract is a financial contract that gives the investor an opportunity to buy or sell an asset at a pre-determined price at a specific date. Options are of two types: call option and put option. The call option allows the investor to buy the asset and a put option allows the investor to sell the asset at a specific price on a specific date. Every options contract has an expiry date by which the holder must exercise the option. (more…)
Asian Option
An Asian option is a type of option in which the average price of the underlying asset over a period of time dictates the payoff of the option. It is different from the American or European option as in these options, the payoff depends on the price of the underlying asset at a particular point in time. They are also known as average value options.
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European Options
When an investor has the right, but not the obligation, to buy or sell a stock at an agreed-upon price and date, it is known as a stock option. There are two types of options: the put option which is a bet that a stock will fall, or the call option which is a bet that the price of a stock will rise. (more…)