Types of Options
- Cash settled vs. Physical Delivery. Another distinction between the different kinds of options is physical delivery vs. cash-settled options. A physical delivery option 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 exercised. 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 exercised during a specified time frame - usually at expiration. An American-style option can be exercised any time before expiration. This means for an option writer that they may be assigned at any time in which the option is able to be exercised.
- Exchange traded vs. over-the-counter. Exchange-traded options have standardized features and trade at exchanges. Over-the-counter options are traded between private parties - 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
