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Options

In: Quantitative Trading with R

Author

Listed:
  • Harry Georgakopoulos

Abstract

Options are tradable derivate contracts that “derive” their value from other underlying instruments. Wikipedia defines these instruments as follows: “An Option is a contract which gives the buyer (the owner) the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price on or before a specified date [130].” They are similar to futures contracts in that they provide a mechanism to purchase or sell a certain physical or financial asset sometime in the future at a price that is known in the present.Whereas futures obligate the contract holder to purchase or sell the underlying asset at the agreed-upon price, options provide the “option” to purchase or sell the underlying asset at the agreed-upon price. This added flexibility or optionality comes at a premium. No upfront exchange of funds is required in order for the buyer and seller to enter into a futures contract. To buy an options contract, however, the buyer has to pay a premium. Similarly, the person selling the option contract gets to collect the premium.

Suggested Citation

  • Harry Georgakopoulos, 2015. "Options," Palgrave Macmillan Books, in: Quantitative Trading with R, chapter 9, pages 199-215, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-43747-1_9
    DOI: 10.1057/9781137437471_9
    as

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