Options, Futures, and Other Derivatives – John C. Hull : [PDF Download]

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“There are two types of options: calls and puts. A call option gives the holder the right to buy the underlying asset for a certain price by a certain date. A put option gives the holder the right to sell the underlying asset by a certain date for a certain price.

There are four possible positions in options markets: a long position in a call, a short position in a call, a long position in a put, and a short position in a put. Taking a short position in an option is known as writing it. Options are currently traded on stocks, stock indices, foreign currencies, futures contracts, and other assets.

An exchange must specify the terms of the option contracts it trades. In particular, it must specify the size of the contract, the precise expiration time, and the strike price. In the United States one stock option contract gives the holder the right to buy or sell 100 shares.

The expiration of a stock option contract is 10:59 p.m. Central Time on the Saturday immediately following the third Friday of the expiration month. Options with several different expiration months trade at any given time. Strike prices are at $2 1 2, $5, or $10 intervals, depending on the stock price.

The strike price is generally fairly close to the stock price when trading in an option begins. The terms of a stock option are not normally adjusted for cash dividends. However, they are adjusted for stock dividends, stock splits, and rights issues.

The aim of the adjustment is to keep the positions of both the writer and the buyer of a contract unchanged.”

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