American Vanilla Option

The Vanilla Option is a contract to buy or sell an underlying asset between two parties. The counterparties of the option contract is 'the option buyer (holder)' and 'the option seller'. The option holder buys the right to 'buy' or 'sell' the underlying asset by a certain date for a certain price. A call option gives the holder to buy the underlying asset and a put option gives the holder to sell the underlying. The price in the contract is known as the strike price, the date is known as the expiry date or maturity. If the option is exercised, then the date that the transaction will be realized is known as the delivery date. American options can be exercised at any time up to expiry.

The details of an option example is as follows.

  • Underlying Asset           : USD/TRY
  • Strike Price                    : 1.6000
  • Trade Date                      : 01/07/2010
  • Expiry Date                     : 01/08/2010
  • Delivery Date                  : 03/08/2010
  • Option Type                    : Call Option
  • Option Premium            : USD 7,800
  • Notional                           : USD 1,000,000

  • A Call option for USD/TRY parity is also defined as USD Call TRY Put option which means that if the option is exercised the option holder will buy USD and sell TRY to option seller. Option Premium is also known as the price of the option. The above option quoatation is given as the percentage of the notional. The above quotation can be explained like that;

        Bid                  Offer
    % 0.65             % 0.78

    If you want to sell the above option then you can sell from the bid price which is % 0.65 of the notional amount. For the 1,000,000 USD notional you will receive 6,500 USD premium for selling this option.

    If you want to buy the above option then you can buy from the offer price which is % 0.78 of the notional amount. For the 1,000,000 USD notional you will pay 7,800 USD premium for buying this option.

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    Below you can find the payoff graphs of the option buyer and the option seller.

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