Part 4 Institutional Trading

Option Styles

Options come in different styles, which dictate when they can be exercised:

American Options

Can be exercised anytime before expiration.

European Options

Can be exercised only on the expiration date.

How Option Trading Works
Buying vs Selling Options

Buying an option: You pay the premium for the right to buy/sell.

Selling an option (writing an option): You collect the premium but take the obligation if the buyer exercises it.

Exercising Options

Exercising is when the holder uses their right to buy or sell at the strike price.

Options in the Secondary Market

Options can also be traded without exercising. Traders can buy and sell options in the market to profit from changes in premiums.

Hedging and Speculation with Options

Options are used both for hedging (reducing risk) and speculation (betting on price movement). For example:

Hedging: Buying put options to protect a stock portfolio.

Speculation: Buying call options to profit from anticipated upward movement.