The Stock Market

The Specification of a Stock Option

Every stock option has four predetermined specifications:

  1. The underlying asset.

  2. The type of stock option (call or put).

  3. The exercise price (or the strike price).

  4. The expiration date (or exercise date).

These four specification are listed in David's letter from his father:

  1. The underlying asset is the asset received -- if, and when, the option is exercised. In this case, the underlying asset is an ounce of gold.

  2. The type of option: The type of option in the letter is a call option.

  3. The exercise price is the price paid for the underlying asset if the option is exercised. David must pay $400 for an ounce of gold.

  4. The expiration date is the date on which the option can be exercised. If David does not exercise his option on March 31, 2009, then the option becomes worthless.

     

     The Name of an Option

    The name of an option has, four parts, and each of these parts is associated with one of the specifications. Below are the specifications of David’s call option:

    The put option that David received from his mother:


    Base Asset

    Option Type

    Exercise Price

    Expiration Date

    Gold Ounce

    Call

    $ 400

    3.31.09


    Base Asset

    Option Type

    Exercise Price

    Expiration Date

    Gold Ounce

    Put

    $ 400

    3.31.09


    The Name of an Option

The Specification of a Stock Option570The Specification of a Stock Option