Description:-
An equity/commodity OTC Option is a normal option contract in which the underlying is an equity/commodity. This underlying could be a single equity/commodity trade or an Index of Equities. The buyer of the trade has the option to exercise this contract and take delivery of the underlying or settle the price difference in cash, depending on the settlement mode.
Type of option contracts,
A Call Option is an option to buy the contract.
A Put Option is an option to sell the contract.
American Option in which the owner is allowed to enter the swap on any day that falls within a range of two dates.
European Option in which the owner is allowed to enter the swap only on the maturity date.
Bermudan Option in which the owner is allowed to enter the swap only certain dates that fall within a range of the start (roll) date and end date.
Why are they traded?
A equity/commodity option allows investors the ability to hedge the risk of their equity/commodity portfolios or speculate on the direction of equity/commodity prices with limited risk.
Life cycle events: –
Premium and pay off’s.
*Pay off = Quantity * (Spot price – Strike) Quantity = 10,000 E.g. Strike price = 1250, Spot price on maturity = 1300. Client is buyer of the option so therefore the pay off would be calculated as (1300-1250) *10,000 = 500,000. Since this is an option trade the pay off would be settled only if the buyer of the trade is in the money. If in case the buyer is Out of the money then the option would be exercised with zero cash.
OTCWIRE 