COMM 308 Chapter Notes - Chapter 12: Call Option, Downside Risk, Option Style

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Call option - right (but not obligation) to buy an underlying asset at fixed price for specified time. Exercise/strike price - price when investor can buy underlying asset. Exercise (convert) - to implement rights of options by buying (in case of call options) or selling (in case of put options) Expiration date - last date where options can be converted or exercised. Payoff - proceeds that would be generated from the option if today was the expiration date. In the money - the option would generate a positive payoff if exercised today. As a result, investor gets payoff from forward contract above strike price and gets 0 below. For this reason, options are examples of securities with non-linear payoffs. Option writer - someone who sells an option. Writes call option purchased by someone else. Short position - taken by option writer.

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