[일배우기] Introduction to Option (1)

Topic 1: Option Basics

 

Option Terminology

Option is the RIGHT, not the obligation for future transation.

 

Option Moneyness @ the expiration date(European option) / the exercise date (American Option)

Spot price > strike price	in-the-money(돈이 된다)	Exercise
Spot price = Strike price	at-the-money(똔똔)	Indifferent
Spot price < Strike price	out-of-the-money(돈이 안된다)	Do not exercise

* Strike price is irrelevant to option premium. Option premium paid at the expiration date is sunk cost.

 

Option Exercise: Cash vs. Physical Settlement

Physical Settlement: whole securities and whole amount of money exchanged.

Cash Settlement: when spot price>strike price, net amount (spot-strike price) is paid.

 

Option Styles

European: exercise only at the expiration date

American: exercise any time until the expiration date

Bermudan: hold for some time and exercise any time after holding period until the expiration date