Before we talk about Strike price we need to take a small look at some concepts related to call and put options.
As already mentioned, the former give the holder the possibility to acquire a certain quantity of the underlying at the Strike price. It is therefore obvious that when you buy a call option you do so because you think that the value of the underlying rises over time.
Put options give us the opportunity to sell the underlying at the Strike price. When you buy a put option, you do so by taking for granted a forecast in which the underlying asset will fall in value over time.
The sale of options without hedging assumes that the seller makes the underlying available at any price it can quote. In this way the seller will receive the fixed reward which in practice represents the gain of the trading activity. Even if put options are sold, the seller will receive a certain reward, while at the same time assuming unlimited risk if a "difficult" market is pre-configured.
We assume that this term indicates the price level at which our contract will be converted when it expires (which is why it is often also referred to as the strike price). Let's see how this value influences the conversion process that interests us the most. Three different cases can occur:
Let's look at the 4 components used to determine the exercise price for stock options:
The strike price is therefore the exercise price specific to the stock in question, i.e. the price at which the holder of the option can buy or sell the underlying security when the option is exercised.
You can exercise an option when it becomes at the money or in the money. But what exactly does it mean to exercise the option? Let's discover it together. First of all we distinguish two different exercise styles:
It is obviously more widespread in the Anglo-Saxon market and is characterised by the peculiarity that it can be exercised at any time; the purchaser can request delivery of the underlying at any time, unless the option has expired or at the money or in the money.
It can be exercised only at the end of the contract or on a specific date established in advance when the contract is signed.
When the expiration date approaches, the contract may expire without value or be exercised. In Italy options can expire (which almost always occurs on the third Friday of the month):
We are talking about something very important because it has a decisive impact on the value of the option. The cost of the reward is in fact characterised by two values: intrinsic (it corresponds to the price of the underlying minus the strike price for a call) and temporal (it decreases as maturity approaches).
We try to provide clarity in a schematic and orderly manner:
Expiration is the end of an option's life. When does it occur? When he has not been given an exercise order during his natural life. So, what can happen when an in-the-money option expires? See below:
It is therefore clear that the professional trader will have to carefully manage his position based on the strategy he has adopted during the purchase phase of the option itself (the possible scenarios certainly concern speculative or hedging strategies).
The guarantee margin is the obligation of buyers and sellers towards the IDEM Market Guarantee Fund (i.e. to guarantee all parties involved in the trading process). In order to comply with these obligations, Brokers are committed to withdraw from the accounts of investors the margins, money with which they can possibly cover any changes in the value of contracts. This necessity arises especially in cases where traders adopt rather speculative strategies.
To fully understand the way in which share contracts are listed, we advise you to start by studying this scheme:
The price of an option is not decided based on the whims of an external body but is determined because of a series of specific factors such as:
Volatility indicates how quickly the price of the underlying changes. More generally, it represents an index of the change (obviously in percentage) of the price of a financial instrument.
If used as part of a regression, it indicates the recording of the ratio between the change in yield with reference to the market being analysed.
In economics the variance is used precisely about a possible measurement of volatility (it is indicated with the symbol Var). Often another value such as the standard deviation (square root of the variance) is also used.
There are, as we have seen, several external factors that contribute to determining the cost of an option. One of these is the factor that is communicated referred to as the Greek. The term "Greek" is generally used to refer to a set of instruments for determining the price sensitivity of an option.
Thanks to these instruments, it is possible to assess in practice the influence of certain external events on the development of the agreed contract, within the life of the option.
Certainly we can count:
Learning and knowing how to take full advantage of these concepts and tools is of fundamental importance because it allows the Trader to operate in safety (precisely because he is more aware of what is happening at a given time in the market in which he operates).
We are sure that, together with the Greeks, one of the tools that will be useful to you when you decide to dive into investing in options, is the payoff chart; this tool can guide you in the design of our operating trades.
In a common graphic representation, we find the payoff on the axis of the ordinates while on that of the abscissae’s is illustrated the variation of the price with the changing of time. The grey line you see is the change in the share price.
First, let us clarify why it is important to use these instruments: they are used to determine in advance the loss and gain that we could bring home with our investments.
When we dive into a call option purchase we are aware that we have to face the payment of the reward and the grey line of payoff results in the space of loss (the loss is represented by a straight line).
If the value of the underlying rises, the call rises in value. The line that indicates the gain is the gray line that stretches out to infinity.
Also with regard to the put option, the maximum loss corresponds to the reward paid while the profit is virtually unlimited.
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