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American options can be exercised at any time up to the expiration date.

European options can be exercised only on the expiration date itself. Most of the options that are traded on exchanges are American. In the exchange-traded equity option market, one contract is usually an agreement to buy or sell 100 shares. European options are generally easier to analyze than American options, and some of the properties of an American option are frequently deducted from those of its European counterpart.

It should be emphasized that an option gives the holder the right to do something. The holder does not have to exercise this right. This is what distinguishes options from forwards and futures, where the holder is obligated to buy or sell the underlying asset.

Whereas it costs nothing to enter into a forward or futures contract, there is a cost to acquiring an option.

The largest exchange in the world for trading stock options is the Chicago Board Options exchange (CBOE,; ww.cboe.com). Table 1.2 gives the midpoint of the bid and offer quotes for some of the American options trading on intel (ticker symbol: INTC) on September 12,2006. The quotes are taken from the CBOE website. The Intel stock price at the time of the quotes was $19.56. The options strike prices are $15.00, $17.50, $22.50, and 25.00 the maturities are October 2006, January 2007, and April 2007. The October options have an expiration date of October 21, 2006; the January options have an expiration date of January 20, 2007, the April options have an expiration date of April 21, 2007.

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Options

In the world of investments, an option is a type of contract between two people where one person grants the other person the right to buy a specific asset at a specific price within a specific time period. Alternatively the contract may grant the other person the right to sell a specific asset at a specific price within a specific time period. The person who has received the right, and thus has a decision to make, is Known as the option buyer because he or she must pay for this right. The person who has sold the right, and thus must respond to the buyer´s decision, is known as the option writer. The variety of contracts containing and options feature is enormous. Even within the domain of publicity traded securities, many types can be found. Traditional only certain instruments are referred to as option: the others, though similar in nature, are designated differently.

Types of option contracts

The two must basic types of option contracts are known as calls and puts. Currently such contracts are traded on many exchanges around the world. Furthermore, many of these contracts are created privately (that is “of exchange” or “over the counter”), typically involving financial institutions or investment banking firms and their clients.

A call option gives the holder the right to buy and asset at a certain price within a specific period of time. Calls are similar to having a long position on a stock. Buyer of calls hope that the stock will increase substantially before the option expires.

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Note how the contract specifies for items:

1. The company whose shares can be bought

2. The number of shares that can be bought

3. The purchase price for those shares, known as the exercise price (or striking price)

4. The date when the right to buy expires, known as the expiration date

A put option gives the holder the right to sell an asset at a certain price within a specific period of time. Put are very similar to having a short position on a stock. Buyer of puts hope that the price of the stock will fall before the option expires.

Note how the contract specifies four items that are analogous to those for call options:

1. The company whose shares can be sold

2. The number of shares that can be

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