# Options Basics

An option contract gives the holder the right, but not the obligation, to buy/sell something at a predetermined date and price.

(1) There are two primary types of options: calls and puts.

- Call Options: Gives the buyer the right to buy a certain quantity of the underlying asset at a certain price within a certain period of time in the future until the expiration date

- Put Options: Gives the buyer the right to sell a certain quantity of the underlying asset at a certain price within a certain period of time in the future until the expiration date

(2) Key elements of options

Term | Definition |

Underlying Asset | The security that you agree to buy or sell as stipulated by the Options Contract. |

Exercise Time | The time at which the buyer can exercise their right as stipulated by the Options Contract |

Strike Price | The price at which the Options Contract stipulates an asset can be bought or sold |

Premium | Amount paid by the Options Buyer to buy the Options Contract |

Exercise | Options buyer chooses to execute their right |

Physical settlement | A manner of settling a derivative transaction under which physical delivery of the underlying or obligation is contemplated under the contract |

Cash settlement | Options holder makes a direct profit based on the difference in price without actual physical delivery of the underlying |

(3) Relationship between Options Strike Price and the price of the underlying asset

Direction | Relationship | Classification |

Call Options | P > S | In-the-money |

P < S | Out-of-the-money | |

P = S | At-the-money | |

Put Options | P > S | In-the-money |

P < S | Out-of-the-money | |

P = S | At-the-money |

S = Strike Price

P = Underlying asset Price

**The Major Greeks**

Greeks | Definition | Example |

Delta | The change in its premium as a result of price changes in its underlying. Call options have positive deltas while put options have negative deltas. | If a call option has a price of $1 and a delta of 0.25, then the optionโs price will move by 25% of the corresponding change in the underlyingโs price. |

Gamma | Speed at which delta changes. All options have positive gamma values. | If options A and B have the same delta values but option B has a higher gamma value. Then option B will have a greater degree of risk since it is more susceptible to price changes. |

Theta | Quantifies the risk with a figure that represents a price drop for each day. All options have a negative theta value. | An option price at $5 with a theta of -0.25 will lose $0.25 daily. |

Vega | Price sensitivity to implied volatility. | A call options purchased for $5 with an implied volatility of 25% and a vega of 0.2. If implied volatility increases by 3%, the new premium will be: option premium = $5 + (3 x 0.2) = $5.60 |

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