Derivatives in Plain Words by Frederic Lau, with a ... - HKU Libraries

and finding a replacement is not a problem.SOME COHMON TERMS OF OPTIONSFinancial options such as stock options are quite similar to this simple formof option. Here are some financial jargons of options:A call option gives the option buyer the right but not the obligation tobuy a financial instrument or a commodity at a specific price on orbefore a particular date in the future. This specific price is usually calledthe exercise price or strike price.A put option gives the option buyer the right but not the obligation tosell a financial instrument or a commodity at a specific price on orbefore a particular date in the future.When you buy an option (or any financial instruments or commodities),you are an option holder and you are said to have a long position of theoption.The seller or the writer of an option is said to have a short position ofthe option.An American option allows the option holder to exercise the option onor before the option expiration date.A European option allows the option holder to exercise the option onlyon the expiration date.An at-the-money option is an option whose exercise price is the sameas the market price.An in-the-money option is an option whose exercise price is lower thanthe market price for call options and higher than the market price forput options.An out-of-the-money option is an option whose exercise price is higherthan the market price for call options and lower than the market pricefor put options.Introduction of Options