Types of Options : There are several types of options which are available as options trading today.
Exchange-traded options
These are also known as “listed options” which are exchange-traded derivatives with standardized contracts. Exchange-traded options are settled through clearing houses with a guaranteed fulfillment by the exchange credit. Its standardized contracts bring about accurate pricing models. You will find stock options, commodity options, index options, bond options, interest rate options, futures contracts options and callable bull or bear contract options under exchange-traded options available for options trading.
Contract specifications
An options trading has a contract; it is between two parties who agree on the terms and conditions of the transaction listed in a term sheet. Although option contracts may be complicated, they normally contain the following specifications: the right to call or put by option holder, the class and quantity of specified asset, strike price, expiry date, settlement terms and amount payable.
OTC options
OTC or over-the-counter options are also referred as dealer options which are traded by 2 private parties; hence, these are not seen on the exchange markets. The OTC option terms are unrestricted to tailor to the business need or participating parties; one of which is usually a high capital institution.
Other option types
There are a few OTC options that can be traded: interest rate, currency cross rate and swap options.You can also find employee stock options which a company presents to its employees as incentive compensation or real estate options which are used in assembling large land pieces while prepayment options are available in mortgage loans.No matter what type of options trading is exercised, there are risks involved which require proper risk and valuation management principles.
Option styles
Options are named according to the common properties of each option type. For example, a European option can only be exercised when it expires; an American option can be exercised only on a trading day before its expiry; a Bermudan option can be exercised on certain dates before expiration; a Barrier option can be exercised when its underlying security price exceeds a barrier price; an Exotic option refers to a broad options category with complex financial structures; a Vanilla option is not an Exotic option. All these styles are possible options trading.
Valuation models
An options value is calculated based on risk free pricing and stochastic calculus using the Black-Scholes model or more sophisticated models for attaining the volatility smile. There is a great involvement of numerical techniques in the calculations.Factors affecting the option valuation include current market pricing of underlying asset, FX Trade, strike price, holding cost, expiry date and future volatility.
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