Options are financial instruments that are derivatives or based on underlying securities such as stocks. An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset. In true sense there are only two type of options i.e call & put options. All other options in the market are all the combination of strategies based on these true categories.
A put option is an option to sell an underlying shares on or before its expiration date.
Purchasing a put option means that you are bearish about the market and hoping that the price of the underlying shares may go down. In order for you to make profit the price of the shares should go down from the strike price of the put option that you have purchased before or at the time of its expiration. Puts are sometimes thought of as portfolio insurance, because they give you the option of selling a falling stock at a predetermined strike price. You can also sell puts.
A call option is an option to buy an underlying shares on or before its expiration date.
(Think of it as a bet that the underlying asset is going to rise in value.) If you don’t buy the asset by the time the option expires, you lose only the money that you spent on the call option. When you exercise a call, you’re buying the underlying stock or asset at the strike price, the predetermined price at which an option will be delivered when it is exercised.
The attractiveness of buying call options is that the upside potential is huge, and the downside risk is limited to the original premium — the price you pay for the option.
An embedded option is a provision in a security (typically a bond) that gives either the issuer (the company) or the investor the right to take some action in the future.
An embedded call (option) grants a company the right to call the issue. An embedded put (option) grants investors the right to put the issue.
A bond may include the embedded option to convert into shares at the request of the holder.
Embedded Call: The company (issuer) has the right to convert bonds into shares of a legal entity in a certain conversion rate (CU 100 par value of bonds per x amount/number of shares).
Embedded Put: The bondholder has the right to convert bonds into shares of a legal entity in a certain conversion rate (CU100 par value of bonds per x amount/number of shares).
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