chap 5 ag futures

• Options are specialized financial instruments that give the purchaser the right but not the obligation to do something.
• That is, the purchaser can do something if he/she wants to, but he/she does not have to do it.

• The buyer of a call option has the right but not the obligation to purchase a pre-specified amount of a pre-specified asset at a pre-specified price during a pre-specified time period.
• The seller of a call option has the obligation to sell a pre-specified amount of a pre-specified asset at a pre-specified price if asked to do so during a pre-specified time period.

• The buyer of a put option has the right but not the obligation to sell a pre-specified amount of a pre-specified asset at a pre-specified price during a pre-specified time period.
• The seller of a put option has the obligation to purchase a pre-specified amount of a pre-specified asset at a pre-specified price if asked to do so during a pre-specified time period.

The buyer of an option pays the seller of the option a premium on the day that the agreement is entered into

The pre-specified price is referred to as the strike price or the exercise price.

The amount of time specified in the options contract

• The option buyer elects to utilize his/her right.
• -In the case of a call option, the buyer utilizes his/her right to buy the underlying asset.
• -In the case of a put option, the buyer utilizes her/his right to sell the underlying asset.

• Option Writer is the seller of an option
• To write an option is to sell an option

are options that can be exercised only on the maturity date.

options that can be exercised any time prior to maturity.

Writing call options against an asset that the writer owns.

Writing a call option on an asset that the writer does not own.

the value of an option if it is exercised immediately

An institution that oversees the conduct of the market and helps to make the market orderly. Option buyers and sellers only obligations are to the OCC. If an option is exercised, the OCC matches buyers and sellers, and manages the completion of the exercise process