What is a worst of option?
The worst of option is an option where the investor is long a put on the worst performing stock amongst a predefined number of stocks. The pricing of either the best of or the worst of option is typically done by using a Monte Carlo process.
As its name indicates, a worst-of call is a call option on the worst-performing underlying asset among a basket.
A basket option is a type of financial derivative of which the underlying asset is a “basket” of commodities, securities, and currencies. Basket options are normally settled in cash.
In a basket option, the payoff is determined by the weighted average prices of the underlying stocks in a basket. This is different from the case of the usual European option and American option, where the payoff of the option contract depends on the price of the only one underlying instrument at exercise.
As a quanto option, a compo option is also an option denominated in a currency other than the currency in which the underlying asset is traded. Unlike quanto option, the holder of a compo option has exposure to the FX rate. In a compo option, the payout and the strike are fixed in the compo's currency.
What Is a Bermuda Option? A Bermuda option is a type of exotic options contract that can only be exercised on predetermined dates—often on one day each month.
A spread option is a type of option contract that derives its value from the difference, or spread, between the prices of two or more assets. Spread options differ from various option spread strategies constructed with multiple contracts on different strike prices or differing expirations.
Examples of Barrier Options
Assume an investor is purchasing an up-and-in call option with a strike price of $40 and a barrier price of $50. The current underlying asset's price is $50. The barrier option will be invalid until the underlying stock exceeds the price level of $65.
A digital option will be exercised only when the actual price does not match the strike price. Hence, a call option will be exercised if the actual price is more than the strike price by at least one pip (point in percentage) and should be below the strike price by a minimum of one pip for a put option to be exercised.
Depending on the value of correlation between individual stocks, the dispersion can be traded by selling the index options and buying options on index components or by buying index options and selling options on index components.
What is a basket swap?
BASKET SWAP Definition & Legal Meaning
A CREDIT DERIVATIVE contract that involves the exchange of a fixed or floating PREMIUM for a compensatory payment if one or more reference credits in a predefined BASKET DEFAULTS. The swap provides the seller with a credit PORTFOLIO investment and the buyer with a credit HEDGE.
A shout option is an exotic options contract that allows the holder to lock in intrinsic value at defined intervals while maintaining the right to continue participating in gains without a loss of locked-in monies.
The three basic types are American, European, and Bermudan options. Let's explore American vs European vs Bermudan options to find out how they are different from one another. Options are exactly what they sound like – a choice for investors using the stock market.
Vanilla Option Features
An American style option can be exercised if it is in the money on or before the expiration date. The premium is the price paid to own the option.
Key Takeaways
Russian options are exotic options that have both a lookback provision and no expiration date. The holder of these options can exercise them whenever they want, at the best price the underlying security has ever sold for. Russian options were first proposed in a 1993 academic paper.
An American Call option allows the holder of the option the right to ask for the delivery of the security or stock anytime between the execution date and the expiration date when the price of the assets shoots above the strike price. In an American Call option, the strike price does not change throughout the contract.
A knock-in option is a type of contract that is not an option until a certain price is met. So if the price is never reached, it is as if the contract never existed. However, if the underlying asset reaches a specified barrier, the knock-in option comes into existence.
The most successful options strategy is to sell out-of-the-money put and call options. This options strategy has a high probability of profit - you can also use credit spreads to reduce risk. If done correctly, this strategy can yield ~40% annual returns.
The riskiest of all option strategies is selling call options against a stock that you do not own. This transaction is referred to as selling uncovered calls or writing naked calls. The only benefit you can gain from this strategy is the amount of the premium you receive from the sale.
There are three main types of options spread strategy: vertical, horizontal and diagonal.
What is a double no touch option?
A double no-touch option is a binary option where the buyer receives a fixed payout if the underlying price remains within specified price boundaries until expiration. If the price touches or exceeds the price boundaries (either above or below) at any time, the trader loses what they paid for the option.
Knock-out derivatives are speculative products usually intended for a short-term exposure and entailing the risk of a total loss. For this reason, they are primarily suitable for experienced investors prepared to take a risk.
There are primarily two types of barrier options: knock-out and knock-in barrier options.
A basket order allows you to place multiple orders at the same time. It is now live on Kite web and Kite mobile. You can save the baskets on Kite and use them anytime in the future.
BASKET SWAP Definition & Legal Meaning
A CREDIT DERIVATIVE contract that involves the exchange of a fixed or floating PREMIUM for a compensatory payment if one or more reference credits in a predefined BASKET DEFAULTS. The swap provides the seller with a credit PORTFOLIO investment and the buyer with a credit HEDGE.
A digital option will be exercised only when the actual price does not match the strike price. Hence, a call option will be exercised if the actual price is more than the strike price by at least one pip (point in percentage) and should be below the strike price by a minimum of one pip for a put option to be exercised.
The Quanto option is a cash-settled, cross-currency derivative in which the underlying asset has a payoff in one country, but the payoff is converted to another currency in which the option is settled.
