Options are capital markets instruments that give the holder the right, but not the obligation, to buy or to sell an underlying asset at a specified price on or before a predetermined date where such right is exercised by registered delivery or cash settlement. The holder of an option buys not the underlying security itself, but the right to buy or sell such underlying security, against the payment he makes.
Currently, Single Stock, Equity Index and USDTRY Options, Physically Delivered USDTRY Options are traded on VIOP.
Basic Concepts for Option Contracts
Strike Price
Strike price is the buy or sell price of the commodity, asset or financial indicator subject to the contract, as of the future date determined by the parties.
Option Premium
Option premium is the fee paid in return for the right to buy or sell.
Long Party
Long party is the buyer of the option contract. In organized option markets, the long party is not exposed to any risks except losing the premium of option contract.
Short Party
Short party is seller of the option contract. In organized option markets, the short party is exposed to risk since he is under obligation to buy or sell on or before the expiry date, and is therefore required to deposit collateral.
Option Class
There are two kinds of options; call options and put options.
Call Options
A call option entitles the buyer to buy a certain quantity of a commodity, asset or financial indicator at a certain strike price on or before a certain expiry date.
The buyer (seller) of a call option expects the underlying asset’s price to increase (decrease) in the future.
Put Option
A put option entitles the buyer to sell a certain quantity of a commodity, asset or financial indicator at a certain strike price on or before a certain expiry date.
The buyer (seller) of a put option expects the underlying asset’s price to decrease (increase) in the future. In the case of both kinds of options, the premium dues are collected from the long party’s account and the short party’s premium receivables are transferred to his account on T day. The premium price is determined on the basis of the supply and demand in the market, and the premium shall not be returned, regardless of the right being used or not.
Rights and Liabilities of Call and Put Options
| Call Option | Put Option | |
|---|---|---|
| Buyer | Right to buy the underlying asset in the event that the option is exercised. | Right to sell the underlying asset in the event that the option is exercised. |
| Seller | Obligation to sell the underlying asset in the event that the option is exercised. | Obligation to buy the underlying asset in the event that the option is exercised. |
Types of Options
Options are classified into two groups, i.e. European and American, on the basis of expiry. The option buyer may exercise American type options on any date before expiry while European type options may be exercised on expiry date only.
Profit/Loss in Options
For a call option, if the spot market price of the underlying asset (S) is higher than its strike price (K), the option is in-the-money. For the same option, if the spot price is smaller than the strike price, the option is out-of-the-money. If the spot price is equal to the strike price, then the option is at-the-money.
1. In-the-money: Spot price > Strike price
2. Out-of-the-money: Spot price < Strike price
3. At-the-money: Spot price = Strike price
In the case of a put option, if the spot market price of the underlying asset (S) is below the strike price (K), the option is at profit. If the spot market price is more than the strike price, the option is at loss. If the spot price is equal to the strike price, then the position is at-the-money.
1. In-the-money option: Spot market price < Strike price
2. Out-of-the-money option: Spot market price > Strike price
3. At-the-money option: Spot market price = Strike price
| Call Option | Put Option | |
|---|---|---|
| S>K | In-the-money | In-the-money |
| S=K | At-the-money | At-the-money |
| S<K |
Out-of-the-money |
Out-of-the-money |
