Underlying Asset

An underlying asset can be described as the financial assets in which prices of a derivative are based upon. In this case, the derivative will be options. It is a financial instrument that can price a specific asset. A useful elucidation can be depicted by an option on an individual stock say XYZ. An options trader has the right to either sell or buy the option at an agreed strike option price which has a limited time. An underlying asset can spot the item being the aim of the contract. This helps an individual to be able to value the contract he or she is signing up for. The underlying asset tends to give participants of the security that is needed by both parties. 

The price of the contract an individual is participating in is often determined by the type of asset being traded. The contract of an options trade is supposed to have two parties who are either buying or selling the underlying assets. Let’s expound on the stock options as the underlying asset. If an individual has the potential of purchasing one hundred shares of a specific company for one hundred American dollars, this will be the determinant of the value possessed by the option contract. An underlying asset can be a market index.

Type of Trading Option

The current financial market has seen numerous types of options being traded. The contract agreed by option trading parties is supposed to have a clear indication of which type of option is being traded. The types of options that are known in the current world tend to categorize and named depending on the varied features they pose. People across the globe are familiar with two types of options. Calls and puts options are widespread in the financial markets. 

Puts option gives a trader the ability to sell underlying assets. On the other hand, call options give an individual trading option the right to purchase an underlying asset. There are two common types of options that have been featured in the options contracts are known as the American and European options. Entering into a contract of American options allows a financial trader to be able to trade his or her underlying assets between the date e or she had purchased them to the date they are bound to be invalid. On the other hand, trade options contracts that contain European options bound an individual to perform his or her trades on the edge of the expiry time.

Strike Price

The presence of a strike price is a common phenomenon in the trade of options. It can be described as a significant component when it narrows down to penning down of an option contract. Options such as calls, and puts are heavily dependent on this factor. Its critical nature can be shown by an option trader who needs the call options. It is crucial because it determines the value possessed by the option. Several people have familiarized strike prices with a different name which is known as the exercise price.

It can inform an investor or trader what the trader what in-the-value money is supposed to be achieved. The underlying price value of the traded assets is supposed to be lower than the strike price. In many cases, the strike price is always affected by the time frame of the contracts. One is supposed to remember that strike price operates on fixed amounts that can be converted to dollars. However, they vary depending on the contract and individual has.

Premium Price 

The premium can be described as the price an option buyer in a contract pays the seller of the option. Terms of an option contract state that the amount is always paid upfront. It is always crucial for a trader to always remember that this component of a contract is not refundable. The rule extends itself to the side that one cannot be refunded his or her money even if the contract has been exercised. The premium quotation in a contract is always done in a certain way for efficiency. The most common way across the globe entails the quotation of option in the foundation of shares which is termed per share basis. The amount of premium is always affected by several variables before it is agreed on. The common determinants of premium prices are swayed by three significant factors that are the volatility value of the option price, its timing, and the intrinsic value.

Expiration Date

One can easily understand the term expiration date of a contract as the last day he or she has the right to exercise either buying or selling the underlying financial instruments. A contract is termed worthless in moments the expiration date has passed.  The expiration date tends to differ depending on the type of contract an individual has entered this despite the general principle of the contract being worthless after the last days. A contract using the American style of option trading gives an options trader the right to be able to trade his or her options from the date he or she purchased them to the day they expire. However, European sty trading fixes an individual to only performing his or her trades on the last days of contract expiration.

Settlement Option The settlement of options can be described as the process by which the holder and writer of an options contract resolve and exercise the terms stated. The process entails the participation of two parties in the trade of options and it differs depending on the options one has decided to trade. It can be illustrated with both the calls and puts options. In calls options, it involves a holder paying the writer of the option. This is the reverse in the puts options since the holder of the options is the one selling them.