From The Jolly Contrarian
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| {{eqderivanat|2.3(a)}}
| | #redirect[[Option Type - Equity Derivatives Provision]] |
| The basic definition of a [[call option]]. I am entitled to buy shares from you at a pre-agreed price ({{eqderivprov|Strike Price}}) on a pre-agreed date (i.e., a {{eqderivprov|European Option}}) or a any time up to a pre-agreed date (i.e., an {{eqderivprov|American Option}}). You can also cash settle a Call by paying the positive difference between the prevailing share price on the {{eqderivprov|Exercise Date}} and the {{eqderivprov|Strike Price}}.
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| But what if the difference between the share price and the Strike Price is negative on the Exercise Date? Then you wouldn't exercise your [[call option]], friend, because you are {{Latin|homo economicus}}, remember: the modern embodiment of the [[Reasonable person|rational person on the Clapham Omnibus]].
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| At any time where the prevailing share price is above the {{eqderivprov|Strike Price}}, your option is [[in-the-money]]. If the share price is below the {{eqderivprov|Strike Price}} it is [[out-of-the-money]]. The option has [[time value]] though, so just because it it out of the money it doesn't mean it's worthless.
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Latest revision as of 12:21, 10 May 2022