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KembaraXtra – Islamic Derivatives: Option Contracts (Clear Explanation & Key Concepts)
🔹 What is an Option?
👉 An option is a contract that gives the holder:
🔹 Key Terms
✔ Strike Price (Exercise Price)
✔ Expiration Date
✔ Premium
✔ Contract Size
✔ Underlying Asset
🔹 Important Note
👉 The company does NOT issue options
✔ Unlike warrants (issued by company)
🔹 4 Basic Option Strategies
🔸 1. Buying Call (Long Call)
✔ Profit when price rises
🔸 2. Buying Put (Long Put)
✔ Profit when price falls
🔸 3. Selling Call (Short Call)
✔ Profit = premium
❗ Risk = high if price rises
🔸 4. Selling Put (Short Put)
✔ Profit = premium
❗ Risk = high if price falls
🔹 Simple Summary
🔹 Final Exam Insight
👉 “Options are contracts granting the right, but not obligation, to buy or sell an underlying asset at a predetermined price within a specified time, with four main strategies involving buying and selling calls and puts.”
🔹 What is an Option?
👉 An option is a contract that gives the holder:
- The right (not obligation)
- To buy or sell a specific asset
- At a fixed price (strike price)
- Within a specific time period (until expiry date)
🔹 Key Terms
✔ Strike Price (Exercise Price)
- The fixed price agreed in the contract
✔ Expiration Date
- The last date the option can be used
- Example: often third Friday of the month
✔ Premium
- Amount paid by buyer to seller
- Cost of getting the option right
✔ Contract Size
- 1 option contract = 100 shares
✔ Underlying Asset
- The asset the option is based on
- Example: stock shares
🔹 Important Note
👉 The company does NOT issue options
- Options are created and traded between:
- Investors
- Traders
✔ Unlike warrants (issued by company)
🔹 4 Basic Option Strategies
🔸 1. Buying Call (Long Call)
- Right to buy
- Expect price to increase 📈
✔ Profit when price rises
🔸 2. Buying Put (Long Put)
- Right to sell
- Expect price to decrease 📉
✔ Profit when price falls
🔸 3. Selling Call (Short Call)
- Obligation to sell
- Expect price to stay or fall
✔ Profit = premium
❗ Risk = high if price rises
🔸 4. Selling Put (Short Put)
- Obligation to buy
- Expect price to stay or rise
✔ Profit = premium
❗ Risk = high if price falls
🔹 Simple Summary
- Option = right to buy/sell at fixed price
- Buyer pays premium
- Seller has obligation
- 4 strategies:
- Long call
- Long put
- Short call
- Short put
🔹 Final Exam Insight
👉 “Options are contracts granting the right, but not obligation, to buy or sell an underlying asset at a predetermined price within a specified time, with four main strategies involving buying and selling calls and puts.”
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