Futures contract

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In finance, a put or put option option on futures wiki a stock market device which gives the option on futures wiki of a put the right, but not the obligation, to sell an asset the underlyingat a specified price the strikeby a predetermined date the expiry or maturity to a given party the seller of the put.

The purchase of a put option is interpreted as a negative sentiment about the future value of the underlying. Put options are most commonly used in the stock market to protect against the decline of the price of a stock below a specified price.

In this way the buyer of the put will receive at least the strike price specified, even if the asset is currently worthless. If the strike is Kand at time t the value of the underlying is S toption on futures wiki in an American option the buyer can exercise the put for a payout of K-S t any time until the option's maturity time T. The put yields a positive return only if the security price falls below the strike when option on futures wiki option is exercised.

A European option can only be exercised at time T rather than any time until Tand a Bermudan option can be exercised only on specific dates listed option on futures wiki the terms of the contract. If the option is not exercised by maturity, it expires worthless. The buyer will not exercise the option at an option on futures wiki date if the price of the underlying is greater than K. The most obvious use of a put is as a type of insurance. In the protective put strategy, the investor buys enough puts to cover his holdings of the underlying so that if a drastic downward movement of the underlying's price occurs, he has the option to sell the holdings at the strike price.

Another use is for speculation: Option on futures wiki may also be combined with other derivatives as part of more complex investment strategies, and in particular, may be useful for option on futures wiki. By put-call paritya European put can be replaced by buying the appropriate call option and selling an appropriate forward contract. The terms for exercising the option's right to sell it differ depending on option style. A European put option allows the holder to exercise the put option for a short period of time right before expiration, while an American put option allows exercise at any time before expiration.

The put buyer either believes that the underlying asset's price will fall by the exercise best after hours trading brokers or hopes to protect a long position in it.

The advantage of buying a put over short selling the asset is that the option owner's risk of loss is limited to the premium paid for it, whereas the asset short seller's risk of loss is unlimited its price option on futures wiki rise greatly, in fact, in theory it can rise infinitely, and such a rise is the short seller's loss.

The put writer believes that the underlying security's price will rise, not fall. The writer sells the put to collect the premium. The put writer's total potential loss is limited to the put's strike price less the spot and premium already received. Puts can be used also to limit the writer's portfolio risk and may be part of an option spread. That is, the buyer wants the value of the put option to increase by a decline in the price of the underlying asset below the strike price.

The writer seller of a put is long on the option on futures wiki asset and short on the put option itself. That is, the seller wants the option to become worthless by an increase in the price of the underlying asset above the strike price. Generally, a put option that is purchased is referred to as a long put and a put option that is sold is referred to as option on futures wiki short put. A naked putalso called an uncovered putis a put option whose writer the seller does not have a position in the underlying stock or other instrument.

This strategy is best used by investors who want to accumulate a position option on futures wiki the underlying stock, but only if the price is low enough. If the buyer fails to exercise option on futures wiki options, then the writer keeps the option premium as a "gift" for playing the game. If the underlying stock's market price is below the option's strike price when expiration arrives, the option owner buyer can exercise the put option, option on futures wiki the writer to buy the underlying stock at the strike price.

That allows the exerciser buyer to profit from the difference between the stock's market price and the option's strike price. But if the stock's market option on futures wiki is above the option's strike price at the end of expiration day, the option expires worthless, and the owner's loss is limited to the premium fee paid for it the writer's profit.

The seller's potential loss on a naked put can be substantial. If the stock falls all the way to zero bankruptcyhis loss is equal to the strike price at which he must buy the stock to cover the option minus the premium received. The potential upside is the premium received when selling the option: During the option's lifetime, if the stock moves lower, the option's premium may increase depending on how far the stock falls and how much time passes.

If it does, it becomes more costly to close the position repurchase the put, sold earlierresulting in a loss. If the stock price completely collapses before the put position is closed, the put writer potentially can face catastrophic loss.

In order to protect the put buyer from default, the put writer is required to post margin. The put buyer does not need to post margin because the buyer option on futures wiki not exercise the option if it had a negative payoff. A buyer thinks the price of a stock will decrease. He pays a premium which he will never get back, unless it is sold before it expires.

The buyer has the right to sell the stock at the strike price. The writer receives a premium from the buyer. If the buyer exercises his option, the writer will buy the stock at the strike price. If the buyer does not exercise his option, the writer's profit is the premium. A put option is said to have option on futures wiki value when the underlying instrument has a spot price S below the option's strike price K.

Upon exercise, a put option on futures wiki is valued at K-S if it is " in-the-money ", otherwise its value is zero. Prior to exercise, an option has time value apart from its intrinsic value. The following factors reduce the time value of a put option: Option pricing is a central problem of financial mathematics.

Trading options involves a constant monitoring of the option value, which is affected by changes in the base asset price, volatility and time decay.

Moreover, the dependence of the put option value to those factors is not linear — which makes the analysis even more complex. The graphs clearly shows the non-linear dependence of the option value to the base asset price. From Wikipedia, the free encyclopedia. This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources.

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Open interest also known as open contracts or open commitments refers to the total number of outstanding derivative contracts that have not been settled offset by delivery. For each buyer of a futures contract there must be a seller. From the time the buyer or seller opens the contract until the counter-party closes it, that contract is considered 'open'. Many [ citation needed ] technical analysts believe that a knowledge of open interest can prove useful toward the end of major market moves.

For some [ citation needed ] option traders, open interest indicates the intensity of trading in a financial instrument. If open interest increases suddenly, it is likely [ citation needed ] that new information about the underlying security has been revealed, which may indicate a near-term rise in the underlying security's volatility.

However, neither an increase in volatility nor open interest necessarily indicate anything about the direction of future price movements. A leveling off of open interest following a sustained price advance is often [ citation needed ] an early warning of the end to an uptrending or bull market.

Technical analysts view [ citation needed ] increasing open interest as an indication that new money is flowing into the marketplace. From this assumption, one could conclude that the present trend will continue. Analogously, declining open interest implies that the market is liquidating, and suggests that the prevailing price trend is coming to an end.

A common misconception is that open interest is the same thing as the number of option contracts traded.

The difference between the two can be explained with a short scenario here;. Further, according to the definition of open interest in this entry, a change in open interest indicates a difference in the number of buyers and sellers of a financial instrument, or at a minimum an increase or decrease in the size of participants' positions. Like volatility, it has no directional component, it is just a tally of unsettled contracts.

For example, if trader X buys 2 futures contracts from trader Y who is the seller , then open interest rises by 2. If another trader A buys 2 futures contracts from trader B, then the open interest rises to 4. Now, if trader X unwinds his position and the counter party is either Y or B, then the open interest in the system will reduce by that quantity. But if X unwinds his position, and the counter party is a new entrant, say C, then the open interest will remain unchanged.

The level of outstanding positions in the derivatives segment is one of the parameters widely tracked by the market. One complication involved when looking at the overall level of open interest in a futures market is the impact of deliveries.

In a physically-delivered commodity, when delivery ultimately takes place the contract that has been delivered is no longer included in the overall open interest tally.

Open interest provide useful information that should be considered when entering an option position. First, let's look at exactly what open interest represents. Unlike stock trading, in which there is a fixed number of shares to be traded, option trading can involve the creation of a new option contract when a trade is placed.

Open interest will tell you the total number of option contracts that are currently open—in other words, contracts that have been traded but not yet liquidated by either an offsetting trade or an exercise or assignment.

For example, say we look at Microsoft and open interest tells us that there have been 81, options opened for the March You may be wondering if that number refers to options bought or sold. The answer is that you have no way to know for sure how many transactions have taken place but you do know that there are 81, options contracts that remain open. Since there is 1 bought position and 1 sold position for each of these contracts, there are 81, positions that remain bought to 'open' and 81, positions that remain sold to 'open' for the March There are always the same number of positions on either side of the open transactions.

So, when an option is traded with one party opening and one party closing, the open interest remains unchanged. If both parties in the transaction are closing positions then the open interest decreases accordingly. If both parties are opening positions then the open interest goes up accordingly. One way to use open interest is to look at it relative to the volume of contracts traded. When the volume exceeds the existing open interest on a given day, this suggests that trading in that option was exceptionally high that day.

Open interest can help you determine whether there is unusually high or low volume for any particular option. Open interest also gives you key information regarding the liquidity of an option.

If there is no open interest for an option, there is no secondary market for that option. When options have large open interest, it means they have a large number of buyers and sellers, and an active secondary market will increase the odds of getting option orders filled at good prices.

So, all other things being equal, the bigger the open interest, the easier it will be to trade that option at a reasonable spread between the bid and ask. Increasing open interest means that new money is flowing into the marketplace. The result will be that the present trend up, down or sideways will continue.

Declining open interest means that the market is liquidating and implies that the prevailing price trend is coming to an end.

A knowledge of open interest can prove useful toward the end of major market moves. A leveling off of open interest following a sustained price advance is often an early warning of the end to an uptrending or bull market. An increase in open interest along with an increase in price is said [ citation needed ] to confirm an upward trend.

Similarly, an increase in open interest along with a decrease in price confirms a downward trend. An increase or decrease in prices while open interest remains flat or declining may indicate a possible trend reversal. The relationship between the prevailing price trend and open interest can be summarized by the following table: From Wikipedia, the free encyclopedia.

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