Options trading is a form of derivative trading in which people trade contracts that give them the rights (but not obligation) to buy or
sell an underlying asset at a predetermined price.
The key idea behind the model is to hedge the option by buying and
selling the underlying asset in just the right way and, as a consequence, to eliminate risk.
The primary difference between options and futures is that options give the holder the right to buy or
sell the underlying asset at expiration, while the holder of a futures contract is obligated to fulfill the terms of his contract.
Now I heard that market makers always hedge their positions by buying or
selling the underlying assets so that whether the market goes up or down, they always make money.
The key financial insight behind the equation is that one can perfectly hedge the option by buying and
selling the underlying asset in just the right way and consequently «eliminate risk».
The downside of these Binary Options are that unlike traditional options, the holder does not have any right to purchase or
sell the underlying asset.
gives the buyer the right and not the obligation to
sell an underlying asset at a predetermined price at or before the expiry.
A call option gives the buyer the right to buy an underlying asset at a predetermined price at or before the expiry, whereas put option gives the buyer the right and not the obligation to
sell an underlying asset at a predetermined price at or before the expiry.
Unless the cashflow is negative, there's no reason for the fund to
sell the underlying assets.
By the time they get to buying or
selling the underlying assets, the market may have moved or they may even move the market with those transactions.
«market makers always hedge their positions by buying or
selling the underlying assets» - this is not true.
If the issuer has enough cash for paying off its creditors, rather than
selling the underlying assets, the company uses the cash for paying the first mortgage bondholders before others.
Stock futures are financial contracts, that is, legally binding agreement between two parties, to buy and
sell underlying asset (stocks in this case) of specifying quantity in a future date at a price agreed upon between the buyer and the seller.
On the other hand, a writer, or seller, of a call option is obligated to
sell the underlying asset at a predetermined price, known as the strike price, if the call option the investor sold is exercised.
An option is a derivative instrument that gives the purchaser the right, but not the obligation to, buy or
sell an underlying asset at a certain price (exercise price) on or before an agreed date.
Unlike other options the holder does not have the right to buy or
sell the underlying asset.
The liquidity of an ETF is driven not only by the trading volume of the ETF itself, but also by the ease of obtaining and
selling its underlying assets.
Put Options and Example Put options give the holder the right to
sell an underlying asset at a specified price (the strike price).
ETFs can take advantage of their two - tier structure (market makers create and redeem shares in exchange for the underlying assets, then sell / buy those shares to / from you) to essentially eliminate «capital gains distributions» (those pesky annual payouts that a fund is required to make when
it sells its underlying assets at a profit as part of share redemption or asset rebalancing).
An option is a binding, specifically worded contract that gives its owner the right to buy or
sell an underlying asset at a specific price, on or before a certain date.
«Option» is the right to buy or
sell the underlying asset but without any obligation.
The right given by an options contract will lapse when the option reaches maturity, at which time the holder will no longer possess the right to buy or
sell the underlying asset.
Options trading: Options trading is a form of derivative trading in which people trade contracts that give them the rights (but not obligation) to buy or
sell an underlying asset at a predetermined price.