《旅游管理专业英语》(第二版) 讲义 Lesson11 Option

Option

It is a contract giving the holder the right but not the obligation to trade in a commodity, a share,

or a currency on some future date at a pre-agreed price. A “put” option gives the holder the right to

sell at a pre-agreed price. This can be used to reduce risk by somebody who has to hold the actual

asset and is worried that its price may fall; it can equally be use to speculate on a price fall. A

“call” option gives the holder the right to buy at a pre-agreed price. This can be used to reduce risk

by people who expect to need the asset in the future and are worried that its price may rise before

they buy; it can equally be used to speculate on a price rise. An options market is a market in

which options are traded; these exist for many widely traded goods, shares, and currencies. Share

options give a right to buy company shares at a future date at a pre-agreed price; they are used by

companies as incentives for their executives. An option is contrasted with a futures contract, which

carries the obligation as well as the right to trade.

In finance, an option is a contract whereby the contract buyer has a right to exercise a feature of

the contract (the option) on or before a future date (the exercise date). The 'writer' (seller) has the

obligation to honour the specified feature of the contract. Since the option gives the buyer a right

and the seller an obligation, the buyer has received something of value. The amount the buyer

pays the seller for the option is called the option premium.

Most often the term "options" refers to a derivative security, an option which gives the holder of

the option the right to purchase or sell a security within a predefined time span in the future, for a

predetermined amount. (Specific features of options on securities differ by the type of the

underlying instrument involved.) However real options are another common type. A real option

may be something as simple as the opportunity to buy or sell a house at a given price at some

period in the future. The writer has the obligation to sell the house to the option buyer for the price

agreed in the option while the option buyer does not have to purchase the house at all, so again the

buyer has received something of value. Real options are an increasingly influential tool in

corporate finance.

The option contract

For the option purchaser (also called the holder or taker), the option:

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offers the right (but imposes no obligation),

to buy (call option) or sell (put option)

a specific quantity (e.g. 100)

of a given financial underlying (e.g. shares)

at an agreed price (exercise or strike price), or calculable value (based on a reference

rate)

either before maturity date (American option) or at a fixed maturity date (European

option)

for a premium (option price).

The counterparty (option writer / seller) has an obligation to fulfill the contract if the option holder

exercises the option. In return, the option seller receives the option price or premium. Yeah.

Option frameworks

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The buyer assumes a long position, and the writer a corresponding short position. (Thus

the writer of a call option, is "short a call" and has the obligation to sell to the holder, who

is "long of a call option" and who has the right to buy. The writer of a put option is "on

the short side of the position", and has the obligation to buy from the taker of the put

option, who is "long a put".)

The option style will affect the terms and valuation. Generally the contract will either be

American style - which allows exercise before the maturity date - or European style -

where exercise is on a fixed maturity date. European contracts are easier to value and

therefore to price. The contract can also be on an exotic option.

Buyers and sellers of options do not (usually) interact directly; the options exchange acts

as intermediary and quotes the market price of the option. The seller guarantees the

exchange that he can fulfill his obligation if the buyer chooses to execute.

The risk for the option holder is limited: he cannot lose more than the premium paid as he

can "abandon the option". His potential gain is theoretically unlimited; see strike price.

The maximum loss for the writer of a put option is equal to the strike price. In general, the

risk for the writer of a call option is unlimited. However, an option writer who owns the

underlying instrument has created a covered position; he can always meet his obligations

by using the actual underlying. Where the seller does not own the underlying on which he

has written the option, he is called a "naked writer", and has created a "naked position".

Options can be in-the-money, at-the-money or out-of-the-money. The "in-the-money"

option has a positive intrinsic value, options in "at-the-money" or "out-of-the-money"

have an intrinsic value of zero. Additional to the intrinsic value an option has a time value,

which decreases, the closer the option is to its expiry date (also see option time value).

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Option pricing models

Historically the pricing of options was entirely ad hoc. Traders with good intuition about how

other traders would price options made money and those without it lost money. Then in 1973

Fischer Black and Myron Scholes published a paper proposing what became known as the

Black-Scholes pricing model, and for which Scholes received the 1997 Nobel Prize (Black had

died, and was therefore not eligible). The model gave a theoretical value for simple put and call

options, given assumptions about the behavior of stock prices. The availability of a good estimate

of an option's theoretical price contributed to the explosion of trading in options. Researchers have

subsequently generalized Black-Scholes to the Black model, and have developed other methods of

option valuation, including Monte Carlo methods and Binomial options models.

Option uses

One can combine options and other derivatives in a process known as financial engineering to

control the risk in a given transaction. The risk taken on can be anywhere from zero to infinite,

depending on the combination of derivative features used.

Note, by using options, one party transfers (buys or sells) risk to or from another. When using

options for insurance, the option holder reduces the risk he bears by paying the option seller a

premium to assume it.

Because one can use options to assume risk, one can purchase options to create leverage. The

payoff to purchasing an option can be much greater than by purchasing the underlying instrument

directly. For example buying an at-the-money call option for 2 monetary units per share for a total

of 200 units on a security priced at 20 units, will lead to a 100% return on premium if the option is

exercised when the underlying security's price has risen by 2 units, whereas buying the security

directly for 20 units per share, would have led to a 10% return. The greater leverage comes at the

cost of greater risk of losing 100% of the option premium if the underlying security does not rise

in price.

Other instruments to manage risk or to assume it include:

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Futures

Forwards

Swaps