The most famous and used options - Part 2

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

by Lorenzo Ciotti
The most famous and used options - Part 2
© Mario Tama / Staff Getty Images News

Here are some of the most famous, used or well-known options. The growing complexity of financial markets has led to a proliferation of these types of instruments. Rubinstein (1992) suggests the identification of 11 possible categories, but in light of the rapid dynamics with which the segment develops, this classification can only be partial.

There are package options, binary options, path dependent options, compound options, options on more than one underlying asset and many more. An example of an exotic path-dependent option is the Asian option, in which the pay off depends on the average of the prices of the underlying in the period considered.

Various approaches can be followed to evaluate exotic options. For some classes of exotic options it is possible to write a closed-form valuation formula, which can be obtained by assuming that we operate in a market which in the literature is called the Black-Scholes environment.

For other categories of exotic options, not even assuming that we operate in the Black – Scholes environment is it possible to calculate the expected profit. In such cases, numerical methods must be used for the evaluation, such as Monte Carlo and quasi-Monte Carlo simulation techniques, the construction of binary decision trees or the discretization of the differential equations that regulate the price of the options.

What is an option

The option is a stock market contract on the basis of which the writer (writer) or seller (seller) transfers to the buyer (buyer) or proposer (proposer) the right to sell (put option) or buy (call option) a certain amount of financial or real assets, underlying assets, at a pre-established base price or exercise price, (strike price or exercise price), commodities and forward contracts (futures).

The underlying asset must have a market with official and publicly recognized prices; Typically, options are built on stocks, currencies, interest rates, commodities and futures. The buyer, by purchasing a call option (call), acquires the right to purchase the asset underlying the contract; vice versa, by purchasing a put option (place) you acquire the right to sell it.

The subscriber, however, at the buyer's request, must sell the asset underlying the contract to him who has signed a call option, vice versa he must buy it if he has signed a put option. The buyer acquires a right which he can exercise (if convenient), or abandon if it is not, only losing the prize.

The seller of an option can record a maximum profit equal to the premium received, while theoretically he can lose unlimitedly. To calculate the profit possibly deriving from the exercise of an option it is necessary to consider the outlay constituted by the premium, which is greater the further the expiry of the contract is and the higher the market price is (in the case of a call) or lower (in the case of a put) than the base price.