The term option refers to a financial instrument that is based on the value of underlying securities such as stocks, indexes, and exchange traded funds (ETFs). An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset. Unlike futures, the holder is not required to buy or sell the asset if they decide against it.

Each options contract will have a specific expiration date by which the holder must exercise their option. The stated price on an option is known as the strike price. Options are typically bought and sold through online or retail brokers.

Summary

In this topic we have discussed the general concept and features of option. We have discussed several option strategies and their uses. In addition, we have briefly touched on the method of option valuation. understanding that option are an inexpensive way of reducing or changing the rank risk return characteristics of an investor’s portfolio, we have concluded this topic with a brief discussion of how one might use options to change or reduce the risk exposure of their portfolios.

Self-Assessment / Activity
1. A European put option gives its holder the right to:
A. sell the underlying asset at the exercise price on or before the expiration date.
B. buy the underlying asset at the exercise price on or before the expiration date.
C. sell the underlying asset at the exercise price at the expiration date.
D. buy the underlying asset at the exercise price at the expiration sate.

2. In an option contract, the buyer has the _______________ to conduct the transaction and the seller of the option has the _____________ to deliver.
A. right and the obligation; obligation
B. right but not the obligation; obligation
C. right but not the obligation; right
D. the obligation; right

3. Which one of the following statements regarding options is inaccurate?
A. Options can be used to alter the risk and return characteristics of a portfolio.
B. If the put-call parity does not hold, arbitrage opportunities will be available.
C. A long straddle is usually used when the trader expects the markets to move but is unsure of its direction
D. The profit profile of a long underlying asset can be synthetically replicated by a long put and a short call

4. Which of the following statements in relation to delta is inaccurate?
A. The option delta of a call option is zero when the option is in the money before expiration date.
B. The delta of a put option is computed by taking the delta of a call option-1
C. For small changes in the price of the underlying asset, the delta is represented by N(d1) from the Black Scholes pricing model.
D. A delta of put option is close to-1 when the put option is deep in the money.

Additional questions:
1. What is Option?
A. is refers to a type of financial contract whose value is dependent on an underlying asset, group of assets, or benchmark. 
B. is refers to a financial instrument that is based on the value of underlying securities such as stocks, indexes, and exchange traded funds (ETFs).
C. is a type of derivative contract agreement to buy or sell a specific commodity asset or security at a set future date for a set price.
D. is a derivative contract through which two parties exchange the cash flows or liabilities from two different financial instruments

2. What are the advantages of TRADING OPTIONS?
I. Option can be used to speculate on price movements
II. Options can be used to reduce risk
III. Trading options in lieu of shares reduces transaction costs.
IV. An option offers the trader flexibility.

A. I and II only
B. II and III only
C. II, II and IV only
D. All of the above

3. In general implied volatility increases when the market is _____ and decreases when the market is ___________.
A. bearish, bullish
B. bullish, bearish
C. sideways, bearish
D. bullish, sideways

4. A call option is _____ when the strike price is about the spot price of the underlying security?
A. in the money
B. out of the money
C. at the money
D. near the money

5. A put option is _____ when the strike price is below spot price of the underlying security.
A. in the money
B. out of the money
C. at the money
D. near the money