what are the types of option contract?



what are the types of option contract?..

Answer / v.balasubramani

Types of option contract.
In forex as in the stock market there are several types of
options. In most categories, there are two forms of
options: call and put options. In their regular and most
simple configuration, these belong to the "vanilla”
category. At Finotec, we have added for your convenience
two types of options strategies in this category: the
strangle and the straddle options strategies. These combine
both forms of options (call & put) in different ways and
can be assimilated to basic option strategies.
On the Finotec Trading Platform, you can also trade other
forex options types such as "barrier” and "binary” (also
known as "digital” options). They both belong to the wider
category of "exotic options,” which are very developed in
the foreign exchange market, and which refer either to
variations on the payout characteristics of plain vanilla
options or to options whose validation or invalidation is
conditioned by additional factors (other than just the
expiration time and the strike rate).
Vanilla Options
Call

Put

Strangle Strategy

Straddle Strategy

Exotic Options
Barrier
Binary

Knock in
One touch

Knock out
No touch

Reverse knock in
Double one touch

Reverse knock out
Double no touch

Vanilla Forex Options
Plain vanilla options refer to standard forex options
types: they are defined by a standard strike price and
expiration date and refer to the buying or selling of a
standard call or put option. They give the buyer (holder)
the right, but not the obligation, to buy or sell a set
amount of currency at a certain rate and before a certain
date. For this right, the holder of the options contract
pays the premium (option price) to the seller (writer).
According to evolution of the market and the profitability
of the option, the holder of the option contract will
decide to exercise or not his option. On the Finotec
Trading Platform, traders may buy or sell call and put
options. Note that put and call options are two separate
contracts different from one another and not the other side
of the same transaction.
Call option

A forex call option gives the buyer the right, but not the
obligation, to buy a predetermined amount of currency from
the options contract seller at a set rate (the "strike
price”) and before a specific date (the expiration date).
In the case of a regular call option, the buyer believes
that the rate will go up and will want to buy it at lower
price. For that right, the buyer will pay the premium.
Put option

A forex put option gives the buyer the right, but not the
obligation to sell a predetermined amount of currency at a
set price (strike price) and within a specific time (before
or on the expiration date). The buyer believes that the
rate will drop below the strike price before the expiration
date so he’ll want to sell it at a higher and not lower
rate. In return for this right, the buyer pays the premium
to the writer.
Option Strategies

Traders make their own option strategies by combining
different options. With Finotec, two option strategies are
directly available from our platform: the strangle option
strategy, and the straddle option strategy. Both these
strategies are a combination of two vanilla options. This
means that you don’t have to open two options separately to
implement either of those strategies, you just
click “strangle” or “straddle” and fill in the requested
inputs and both options will open automatically at the same
time.
Strangle Strategy

This options strategy consists in buying or selling a call
and a put option at different strike prices. A trader will
get a long strangle option (buy) in expectation of a sharp
swing of the exchange rate in either direction. The long
strangle strategy has unlimited profit potential if the
exchange rate moves enough in either direction. The value
of a strangle option increases along with the volatility of
the underlying currency pair.
Straddle Strategy

This is another type of option strategy and it consists in
buying (long straddle) or selling (short straddle) both a
call and a put option at the same strike price and for the
same expiration date. A trader will get a long straddle
option (buy) when he/she expects highly volatile market
conditions. The value of a straddle option (premium)
increases along with the volatility and the maturity of the
underlying currency pair.
Back to top
Barrier Option
Barrier options belong to the category of exotic options –
extremely popular among forex option traders – meaning that
they possess a component other than the expiry date and the
strike price. Regarding barrier options, the additional
component is the trigger – or the barrier – which if
reached either brings the option into being (knock in
option) or cancels it (knock out option). You thus choose a
strike price as well as a trigger. Since there is a chance
that these options may never come into effect or may be
canceled, they are generally cheaper that their vanilla
counterpart. Exotic options also include binary options
which are based on a hypothetical scenario where you decide
how much profit you want to make if the rate reaches a
certain level.
Knock in

A knock-in option becomes a regular option (it is "knocked
in”) if and when the trigger price is met before the
expiration date. This means that if the rate is never
reached, the contract is canceled and the buyer loses the
premium. If the barrier rate is met, then the option starts
running like a regular put or call option. Knock-in options
are less expensive than regular options since they have an
additional conditional component that cheapens the price of
the premium. The further the barrier to the spot rate, the
cheaper the premium, since there is a lesser chance that
the option will be knocked in before the expiration date.
Knock out

The knock out option will automatically cease to exist and
expire worthless (it will be "knocked out”) if and when the
trigger price is reached before the expiration date. If the
rate never hits the barrier, the knock out option runs the
same way as a regular option. For a call knock-out option,
the trigger is set below the spot rate, and above for a put
(out-of-the-money). The higher the implied volatility, the
greater the chance the barrier being triggered and the
option being knocked out. Knock-out options are cheaper
than regular put or call option (vanilla) since they may be
knocked out before expiry. The premium gets cheaper as the
barrier gets closer to the spot rate since the option has a
greater chance of being knocked out.
Reverse knock in

The difference between a knock in option and a reverse
knock in option lies in the localization of the trigger
barrier. Whereas the trigger is out-of-the money for a
knock in, it is in-the-money for a RKI.
Reverse knock out

The difference between a knock out option and a reverse
knock out option lies in the localization of the trigger
barrier. Whereas with a regular knock out, the trigger is
set out-of-the-money (meaning below the spot rate for a
call and above for a put), with a RKO, the trigger is set
in-the-money (above the spot rate for a call and below for
a put).
Read more about Barrier Option Back to top
Binary options
Binary options (also known as "rebate” options), are
vanilla put and call options conditioned by something else
other than just the price and the expiration date. They
refer to conditional scenarios that if come true, either
validate or invalidate the option. The trader fixes the
amount of the desired payout he will get if his conditional
scenario proves to be right. The price of the option or
premium represents a percentage of that payout.
One Touch

When buying a one-touch option, traders set that if the
currency trades at a specified rate (trigger), then he/she
will receive a profit whose amount he has decided upon. He
thus knows in advance the extent of his potential profit
(payout) and loss (the premium).
No Touch

When buying this type of option, the trader sets that
he/she will make profit (whose amount he/she sets) if and
only if a currency rate does not reach the specified
trigger before a specified time. The further away the
trigger from the spot rate, the lesser payout potential,
since there is greater probability that the currency will
not touch the strike rate.
Double One Touch

With this type of option, traders choose two triggers and
set the profit they will make if either one is hit.
Usually, double-one-touch options are used when traders
expect highly volatile market conditions but don’t know
what direction the market will take. In this sense, double
one touch options are similar to long straddle or strangle
options.
Double No Touch

Double no touch options are the opposite of the double one-
touch options. Traders buy them when they expect a range-
bound market with a relatively low volatility. In general,
this type of option is profitable during the periods of
consolidation that usually follow significant market moves.
Traders often combine various option types to build their
option trading strategies. By associating different option
types, some traders manage to minimize the risk they are
taking. Some even claim to have found infallible methods.
Others see it as a simple hedging instrument and use it to
secure their funds.

Is This Answer Correct ?    1 Yes 0 No

Post New Answer

More Accounting General Interview Questions

We can Show Director Exp. in Limited Compay,

1 Answers   ABC, Texmo,


What is the difference between tally 6 and tally erp 9?

1 Answers   Infomatics Software Solutions,


if we wrongly entered a payment as a receipt in cash book i.e 500000. then what is the difference in cash book and bank statement during the bank reconciliation.

1 Answers  


what is the diffrence between cash flow & cash fund?

0 Answers  


WHAT IS DEPRICIATION?

8 Answers   Genpact,






what is the entry of arrears salary. but salary sheet is already finished.

1 Answers   Active Freight Services,


ACCOUNTING CONCEPTS AND CONVENTIONS

4 Answers   Bank Of America,


Distinguish between capital expenditure & revenue expenditure

2 Answers  


What is the revenue recognition principle?

0 Answers  


What is LC?

5 Answers  


get fixed assets items

0 Answers  


What is difference between debit note and Proforma Invoice

3 Answers   ICA,


Categories