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KembaraXtra – Islamic Derivatives: Time Limit & Exercising Call and Put Options
🔹 Is There a Time Limit?
👉 Yes — every option contract has a time limit, called the expiry date.
🔹 When Can You Exercise the Option?
This depends on the type of option:
🔸 1. American Option (Flexible)
👉 So:
✔ You can choose the best time
🔸 2. European Option (Restricted)
👉 Even if prices are favorable earlier:
🔹 Example (Simple)
Call Option:
👉 If market price becomes RM4,500:
Put Option:
👉 If market price drops to RM3,500:
🔹 Important Idea
✔ You don’t have to exercise immediately
✔ You choose the most profitable time (if allowed)
✔ But you cannot go beyond the expiry date
🔹 Simple Summary
🔹 Is There a Time Limit?
👉 Yes — every option contract has a time limit, called the expiry date.
- You can only use (exercise) the option within this time
- After the expiry date → the option becomes worthless
🔹 When Can You Exercise the Option?
This depends on the type of option:
🔸 1. American Option (Flexible)
- Can be exercised anytime before expiry
👉 So:
- Call option → exercise when price is above strike price 📈
- Put option → exercise when price is below strike price 📉
✔ You can choose the best time
🔸 2. European Option (Restricted)
- Can be exercised only on the expiry date
👉 Even if prices are favorable earlier:
- You must wait until the end
🔹 Example (Simple)
Call Option:
- Strike price = RM4,000
- Expiry = 1 month
👉 If market price becomes RM4,500:
- American option → exercise anytime before expiry ✅
- European option → wait until expiry ❗
Put Option:
- Strike price = RM4,000
👉 If market price drops to RM3,500:
- American option → exercise anytime ✅
- European option → only at expiry ❗
🔹 Important Idea
✔ You don’t have to exercise immediately
✔ You choose the most profitable time (if allowed)
✔ But you cannot go beyond the expiry date
🔹 Simple Summary
- Yes, there is a time limit (expiry date)
- American option → exercise anytime before expiry
- European option → exercise only at expiry
- After expiry → ❌ no value
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