What Is Exchange Traded Options - 2 Types of Traded Options and Risks That You May Not Know

Dec. 10, 2010 - PRLog -- What Is Exchange Traded Options

In the financial world, Option is a financial instrument that gives the owner the right but not the responsibility for the transaction of his/her assets. The underlying is a stock, futures contract. The option to buy something is called a call, and the option to sell is known as put.

Options are of 2 types:

1) Exchange traded options: This belongs to the exchange trade derivatives that have standardized contracts between two or more parties. It includes:

· Stock

· Index

· Options on futures contracts

· Bond

· Commodity

2) Over the counter options: This belongs to the exchange derivatives where you don't have standardized contracts and there is no intermediary. This includes:

· Currency cross rate

· Interest

· Stock

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American options-this can be exercised anytime before expiry.

European options-this can be exercised only on expiry.

Exotic options-this includes complex financial structures.

Bermudan option-this can be exercised on specific dates only before expiration.

Vanilla option- is any option that is not exotic.

The risks in an Option market are of mainly two types:

Pin Risk: This situation arises when the underlier's value comes very close to the option's value.In this way the option writer may end up with a lot of unwanted residual in the underlie when the markets open for the next day.

Counterparty Risk: This situation arises when one of the parties do not follow the agreement to buy or sell an asset. This can be avoided with the help of standardized contracts with the help of an intermediary.

Option Risk is realized by quantitative analysis and the changes in options due to the changing conditions in the economy. Hence there are risks in this kind of market.

An option contract has a lot of complex rules; we give you certain specifications here:

· You have to see that whether the owner of the stock has the right to Call or Put, i.e., the right to buy or sell an asset respectively.

· The quantity and type of the "underlying" assets. For example 150 shares of WBC Corporation stock.

· The strike price.

· The expiration date.

· The settlement terms, these are based on individual contracts.

· The terms quoted in the market for an option and the actual premium. Get Internet #1 - What Is Exchange Traded Options @ http://tradingcure01.webs.com and be Successful forever!

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