The most famous and used options - Part 1

Here are some of the most famous, used or well-known options

by Lorenzo Ciotti
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The most famous and used options - Part 1
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Here are some of the most famous, used or well-known options. The ISOalfa (Individual stock option) is an option on individual American-style stocks. It provides for the physical delivery of the securities five days after expiry.

They are traded at IDEM and can have monthly or quarterly expiries (March, June, September and December). In each session there are the first three monthly and quarterly expirations. For each call and put, at least 9 strike prices are traded, of which one is at or near the money and at least 4 on each side.

The deadline is the third Friday of the month. Introduced in 1996, it is traded at IDEM. The FTSE MIB option gives the buyer the right, upon payment of a premium, to collect at maturity a sum determined as the product of the value conventionally assigned to each point of the index (now 2.5 euros) and the difference between the value of the index established at the signing of the contract (exercise price) and the value of the index at the expiry of the option.

There is both a call and a put option. The deadlines are the same as ISOalfa with the same trading grid (difference of 500 basis points between each element) and the same deadlines.

The most famous and used options - Part 1

Cap, Floor and Collar are OTC settled options that have interest rates as their object.

Floor is a contract with which the buyer, upon payment of a single or installment premium, acquires the right to receive from the seller at the end of each reference period, an amount equal to the difference of the product between a notional capital at a pre-established rate and a variable market rate (LIBOR and others); consequently the seller of the floor pays the differential if the floor rate is greater than the market rate.

This contract is suitable for an economic operator having a medium-long term loan at a variable rate and who wants to cover the risk of falling rates. Cap is a contract with which the buyer, upon payment of a single or installment premium, acquires the right to receive from the seller at the end of each reference period, an amount equal to the difference of the product between a variable market rate (LIBOR and others) at a notional capital and that at a pre-established rate, as opposed to the Floor; therefore the cap seller pays the differential if the cap rate is lower than the market rate.

The collar is the combination of cap and floor, where the two contracting parties are covered from the event unfavorable to them. A long (buy) interest rate collar is equivalent to buying an interest rate cap and selling an interest rate floor.

The objective of those who purchase an interest rate collar is typically to reduce the cost of purchasing an interest rate cap by collecting the premium on the sale of the interest rate floor.

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