Call - Equity Derivatives Provision: Difference between revisions
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{{eqderivanat|2.3(a)}} | {{eqderivanat|2.3(a)}} | ||
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}}). | 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}}. | ||
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]]. | |||
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. | 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. | ||
Revision as of 14:59, 9 November 2018
Template:Eqderivanat The basic definition of a call option. I am entitled to buy shares from you at a pre-agreed price (Strike Price) on a pre-agreed date (i.e., a European Option) or a any time up to a pre-agreed date (i.e., an American Option). You can also cash settle a Call by paying the positive difference between the prevailing share price on the Exercise Date and the Strike Price.
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 Template:Latin, remember: the modern embodiment of the rational person on the Clapham Omnibus.
At any time where the prevailing share price is above the Strike Price, your option is in-the-money. If the share price is below the 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.