Types of Options
- Cash settled vs. Physical Delivery. Another distinction between the different kinds of options is physical delivery vs. cash-settled options. Physical delivery options means you get a physical delivery of the underlying asset when a call option is exercised. If it is a put option then you have to make physical delivery if the option is exercised.
A cash-settled option allows you to receive a payment of cash when the option is excercised. The amount of cash settlement is the difference between the value of the underlying asset and the exercise price.
An example of a physical delivery option would be a stock option. If you exercise a call option then then the underlying stock will get delivered to you. An example of a cash-settled option would be an index option (an option on a stock index).
- American vs European-style options. The refers to when an option is able to be exercised. A European-style option can only be excersized during a specified time frame - usually at expiration. An American-style option can be exercised anytime before expiration. This means for an option writer that they may be assigned at any time in which the option is excersizeable.
- Exchange traded vs. over-the-counter. Exchange-traded options have standardized features and trade at exchanges. Over-the-counter options are traded between private partie - often big institutions.
- LEAPS. LEAPS (long-term equity anticipation security) are options which don't expire for a year or more but are similar to other options in every other way.
Intro to Stocks
