Talk:Option (finance)

Old discussion

/Archive 1

The archive contains the talk page from Option, from before this article was moved to Option (finance). I moved it because I'm moving Option (disambiguation) to Option, and that talk page was in the way, not to mention it didn't match the article it was attached to. -GTBacchus^(talk) 17:32, 3 February 2007 (UTC)

Option page Redirect

Whoaaa! The discussion page has disappeared, I can't find it! Perhaps just as well. Anyway, I think this is a good resolution of the discussion over financial options, and how the reader can better understand now the subject of all options, and where to look. Certainly I'm happy with it and I think all reasonable participants should be too. So thanks to whoever did this. JohnClarknew 20:07, 21 November 2006 (UTC)

NP, John. BTW, the old discussion page can be found here: Talk:Option. I've set up a redirect on what was the old option page. Here's a trick: type Option in the Wiki search box and hit go. At the top, click on the link that says (Redirected from Option). That prevents the redirect and let's you get back to the original page. Ronnotel 20:18, 21 November 2006 (UTC)

OCC

I believe the OCC only settles stock and index options for the US and some Canadian exchanges - not the CBOT, CME or any of the European exchanges. I think the description in the first paragraph is misleading. Anyone else with more knowledge care to comment? Ronnotel 16:11, 4 December 2006 (UTC)

I made a bit of a change in the intro, including the OCC. The intro is quite technical now in a pretty picky way. I'll suggest people try to keep up with it, in that a small change seems to affect all the different parts. Perhaps an easier way would be to make it very simple, and leave the technical stuff for later.

I think the whole article could use a bit of a tune-up or tightening up. It seems a bit flabby and hairy, e.g. the quotation and symbols section seems (to me) to be rather unimportant. Cutting a bit here and there is probably most important as there are tons of related articles. Does anybody mind if a try? Smallbones 16:25, 4 December 2006 (UTC)

please do. Ronnotel 17:31, 4 December 2006 (UTC)

Naming convention examples

in the section "Option naming conventions", at leat one example is needed. Jackzhp 17:35, 17 April 2007 (UTC)

other types

Can someone please add some explanation for the calendar spread, strip, & strap? Jackzhp 15:19, 18 April 2007 (UTC)

Rewrites

Over the past week, I've been rewriting the various sections, applying some basic copy editing and trying to make the article more like an encyclopedia article rather than a random collection of facts. Given that my changes have been left relatively in tact, I'll leap to the assumption that these changes are mostly in the right direction.

I'm getting close the end of the changes I wanted to make although I do want to go back and do much more sourcing. Does anyone have any suggestions on major topics that need better coverage? My hope is that some day in the not too distant future we can submit this article for GA review. Ronnotel 16:44, 18 June 2007 (UTC)

Over all a great job, this article has needed to be integrated for a long time - I may copyedit and nitpick (a bit) later. I put a list of options exchanges links at the end, from a previous cut - maybe they fit in this way better. Questions I may bring up later on further consideration. 1) Overall uniform semi-technical tone - maybe instead try to have a bit of very simple stuff, some more technical stuff, and then some more for the specialists (i.e. to cover a range of readers) - that's hard to do, I know, but always a consideration and you've done some of it 2) Pin risk - is this a biggy? 3) Wording on options strategies 4) Historical uses of options (I rewrote this section a long time ago, rather than throw out some good with some bad stuff) - does it now fit with the article as a whole? Just some questions that I'll be thinking about before I edit. Keep up the good work. Smallbones 12:20, 19 June 2007 (UTC)

P.S. with a "top importance" article and a "start" class, we should be very happy that this is getting a workover.

Thanks for the feedback. Please do copyedit and aggressively pick those nits wherever you find them. I agree that the tone is somewhat technical and I tried to avoid that wherever I could. However, it is my firm belief that anyone who is afraid of math should probably find something else to do rather than trade options - kind of like the way someone who doesn't like water should avoid swimming. I think the section on Risks is probably the most intimidating and I tried to keep things as simple as possible. However, talking about option risk without describing hedge parameters, was, I felt, a disservice, and I always find that a worked example can go a long way in advancing understanding. I seriously debated breaking this section into a separate page - perhaps that would help bring the tone in a little? Pin risk is not a huge issue, it can be struck but it is a topic of interest to some (we just got pinned big time this past Friday!) and it would be nice to at least keep a reference to the main page so someone who is looking can find it. Historical uses of options is definitely of interest I think, but it should be better researched and sourced. I think I've got a couple of sources lying around that I can take a look at when I start my attacking on sourcing. Thanks again! Ronnotel 12:53, 19 June 2007 (UTC)

I've put in in-line references (very good if you want theis to be a GA). Except for Cox and Rubinsteing they are basic MBA texts and might be more accessable to beginners. They may not be the best cites for a particular point, so I'm not married to the cites. I do think cites are important however. Smallbones 16:47, 20 June 2007 (UTC)

Although it is a good article, it needs a more simple-contextual introducción. It is ok that the rest begin technical and specialist, but the introduction can not be this way, Wikipedia is seen for any kind of people, and should bring at least an contextual-general introduction to them. The article flag is correct and can not go fo GA if it continues. Thanks in advance. I hope the change. —Preceding unsigned comment added by 200.108.215.226 (talk) 13:19, 18 November 2008 (UTC)

not broad enough

this article talks about specific options instruments, but what about Real Options, or talking about Debt and Equity in an options framework? Suicup 18:56, 26 September 2007 (UTC)

I believe the intent of this article is to describe financial options. It began as simply Option, but was renamed some time ago because of exactly the issue you describe. I don't think it's possible to find consensus on what options are to be able to describe them succinctly in one page. However, there are a number links to these other types of options. Clearly, there is already a page on Real Options. There is also a page on Equity derivatives and Bond options. Can you be more specific on what you'd like to see? Ronnotel 19:03, 26 September 2007 (UTC)

Tax

Isn't it a bit odd that this article is over 4000 words and doesn't mention the tax implications anywhere? calr (talk) —Preceding comment was added at 19:47, 20 November 2007 (UTC)

Hmm - interesting point. Which of the notable elements of option taxation are common across the various tax regimes and instrument classes? I'm by no means an expert - but just in the U.S. there are probably dozens if not hundreds of taxation rules, most of which are specific to U.S. tax law. I think a section on taxation would be useful, but it would need to be written for a global audience. Depending on what sort of material there is, would it make sense to break this out into a separate article? Ronnotel (talk) 20:08, 20 November 2007 (UTC)

Other missing sub-topics:

1) options exchanges - what are their roles? which exchanges are active in options and what kinds of options do they deal in?

2) options market makers - for example, which organization decides whether or not options should be offered for a given security? If options are offered for a security, who decides which expiration dates and strike prices to offer? For example, options on an actively traded underlying stock may be written for many expiration dates, some near, some nearly two years in the future. Why not, say, three years in the future? four years? Another example: options on thinly traded stocks, if available at all (who decides?), are often available for only limited expiration dates (a few months in the future) and few strike prices. Who decides that? Who decides when to offer a new expiration date after one has come and gone? Who decides how far in the future the new expiration date should be?

3) I guess it sums to this question: One can only buy or sell options that are actually offered. Who the heck decides which options should be offered and which not?

Goetzkuno (talk) 13:24, 23 March 2010 (UTC)

Good article review

This is a really nicely done article, scholarly, accurate and neutral. I like it a lot. I think that it could use more inline citations, and also that some of the language may be simplified for the general reader. You may want to add a section on covered call writing, even though there is a separate article. Covered calls are the primary way retail investors engage in options trading. The comments above re tax implications are also valid. In general, good job!--Samiharris 19:19, 2 December 2007 (UTC)

The additions to the article since the above dealt with my concerns, esp. on the covered call writing, so I have made this a good article. --Samiharris 19:32, 3 December 2007 (UTC)

Uses

As the article is now GA, we should be more careful about adding major new sections. I'd like to have some discussion on the purpose of a section titled Uses. It also needs to be adequately referenced as per WP:RS. Ronnotel (talk) 23:22, 30 January 2008 (UTC)

I agree, as far as I can see there is nothing here about how anyone can make a living from this. Where is the value generated in options trading? Does it do any good or is it a zero-sum game between gamblers? —Preceding unsigned comment added by Felixwatts (talk • contribs) 09:49, 9 November 2009 (UTC)

expiration

At which date is expiration date often fixed?

Some options expires in the morning, some expires in the afternoon.

• – the option expires at the market close of the last trading day
• – the option expires at the market open of the last trading day

why this? Jackzhp (talk) 14:02, 31 March 2008 (UTC)

future option

vbv —Preceding unsigned comment added by 122.169.53.87 (talk) 10:45, 6 May 2008 (UTC)

Sorry? Zain Ebrahim (talk) 11:03, 6 May 2008 (UTC)

option ticker

For exchange traded options, they have tickers. How are thoese tickers being chosen? I think that we should explain it in the article. Jackzhp (talk) 03:59, 14 May 2008 (UTC)

It turns out we have an entire article on that, option symbol, so I linked it in the article. I'm not sure that topic justifies more explanation in this article, but a link to it is good. Thanks for the suggestion. - Taxman ^Talk 13:58, 14 May 2008 (UTC)

Graphs do not match up horizontally with with the text =

This is for the long calls, short calls, long puts, short puts part.

Moved thread to the bottom. Zain Ebrahim (talk) 19:06, 3 June 2008 (UTC)

Risks Section

The risk section is very complicated and difficult to understand. Wikipedia is used by more than just people with advance knowledge of mathematics, an attempt to make this information more non-expert friendly would be greatly appreciated. Be so empty without me (talk) 03:51, 28 June 2008 (UTC)

Premium

The word "premium" should be (shortly) explained, perhaps elsewhere.132.66.40.82 (talk) 12:43, 16 September 2008 (UTC)

Example

This is my first contribution so I hope I'm doing the right thing. The article is excellent but I feel a simple example would clarify some of the details. For example a call option with an expiry date of ddmmyy at a price of $$$. Current price is $$$ premium = $$$ and so on.--Azzol99 (talk) 04:39, 18 November 2008 (UTC) —Preceding unsigned comment added by Azzol99 (talk • contribs) 04:34, 18 November 2008 (UTC)

Yup! I totally agree. An illustrative example is needed to better understand all the terms included in the article. --Rahoolpaliwal1989 —Preceding undated comment added 09:23, 2 December 2010 (UTC).

External links

User:205.232.183.3, I'm not sure I see the benfit of the links you have been restoring to this article. IMHO, the article seems better off without the link cruft. Can you please explain why you think these links should remain? Ronnotel (talk) 00:00, 8 January 2009 (UTC)

Options are a complicated subject. The links help better explain the subject in easy terms as opposed to just the Wiki page. —Preceding unsigned comment added by 205.232.183.3 (talk) 17:23, 8 January 2009 (UTC)

After reviewing these links, I find them unlikely to offer the reader much more insight. There are lots of links on the web that talk about options and these are in no way special. If you want to propose some potential links that you think would help the page that would be great. But please get consensus here before adding them to the article. Ronnotel (talk) 18:03, 8 January 2009 (UTC)

Edit

The introduction was deemed inaccessible to those unfamiliar with the context. I feel that the intro is now eases readers more gently into the discussion. Also, the last two intro paragraphs were not necessary for an introduction. They provided information beyond the scope of introduction.

I also added a section that gives a quick overview of the factors that influence option prices. I felt that jumping into valuation models without first discussing valuation would throw unseasoned readers through a loop. —Preceding unsigned comment added by Rainpat (talk • contribs) 20:33, 3 March 2009 (UTC)

Ronnotel, the information I attempted to add under the valuation of options is an overview of relationships between variables. This is important information for those new to options valuation. These are extensions of logic rather than new facts. However if you'd be put at ease I do have a quality source. I see your disagreement regarding the intro, however I think you might agree that its current state is inaccessible and that some of the its information is not suitable for an introduction and should be reserved for the main article. —Preceding unsigned comment added by Rainpat (talk • contribs) 21:13, 3 March 2009 (UTC)

Please understand that in no way am I disparaging your efforts. However, I was concerned that the edits introduced some loss of precision. For instance, it is more accurate to define an option as a contract rather than a privilege. Is there something in particular that you think is unaccessible? Ronnotel (talk) 21:20, 3 March 2009 (UTC)

No worries, I do understand that. I agree that an option is a contract, but I think that the word excludes real options. Most options have contracts, but not all of them. Therefore I think word "privilege" is more comprehensive, if less precise. However, upon reflection, maybe a better definition would be "An option is a right to engage in a particular decision..." with following clarifiers like "many options are simply contracts. The option is created by the writer, who then sells the option for a premium. The buyer now holds the option and may exercise it, let it expire, or resell it..." and "...other options have no contracts and are simply inherent in the circumstances. For example a farm owner has the option to develop his field into a condominium complex. The option doesn't exist as a contract, but we know it exists because the option to develop the field potentially makes it more valuable. The option therefore has a value."

My issue with the accessibility is with the last two intro paragraphs. I think they go beyond the scope of the intro and should be put into the main article. However, to be honest I only tinkered with it because of the big "this introduction lacks context" message below the heading.

Rainpat (talk) 21:53, 3 March 2009 (UTC)

Where is the History Section for this Article?

Why is there no history section for the use of options or have options always been a part of investment markets? Are there different types of options? Did they all emerge at the same time on the markets? Did options become available to different national markets at different intervals? Are options offered in all investment markets around the world? What is the context for these investment offerings? How do hedge funds fit into this and when did they emerge as a consequence? I could keep going, but I think I have made my point... Stevenmitchell (talk) 12:48, 19 July 2009 (UTC)

I agree! It would be nice if a history section was added. Ulner (talk) 14:58, 19 July 2009 (UTC)

Obligation incurred by option writing

While buying or call or a put does not obligate the trader in any way, writing a call or put does. The owner of the option may at any time choose to exercise that option, at which point the obligation is invoked and the option writer must sell or buy the underlying security to the person who has bought their written call or put. This is called assignment of the option. While many knowledgeable traders would monitor their trade and buy back their call or put prior to assignment, the obligation exists for the duration of the trade. If you'd like a reference, see any introductory options book, for example, Options for the Beginner and Beyond by Olmstead, pp. 8, 12-13. To describe only one side of the transaction in the lead seems incomplete. Yworo (talk) 14:52, 26 August 2010 (UTC)

OK, good, we're talking about the same thing here. I was worried you were thinking of some type of exotic option that entailed obligations on both parties. I take your point, but I submit that the original text, which I include here:

In finance, an option is a financial instrument that gives its owner the right, but not the obligation, to engage in some specific transaction on an asset.

does describe the situation accurately. This is the lead sentence and I think it should be brief, concise, and accurate and unfortunately, I think your changes introduce an element (the impact on the parties to the sale of the instrument) that can be deferred until a latter sentence. How about removing the reference to the "owner" and simplify? I'll try out a version. Ronnotel (talk) 15:19, 26 August 2010 (UTC)

The lead is supposed to summarize the entire contents of the article. Later in the article we have clear descriptions of the obligations incurred by writing options. The lead needs to summarize that as well as the rights granted by purchasing an option. Yworo (talk) 15:37, 26 August 2010 (UTC)

Well, the following sentence is in the third paragraph. Does this cover the issue or should we try to reformat? Ronnotel (talk) 16:20, 26 August 2010 (UTC)

In return for granting the option, called writing the option, the originator of the option collects a payment, the premium, from the buyer. The writer of an option must make good on delivering (or receiving) the underlying asset or its cash equivalent, if the option is exercised.

I saw that. It doesn't really mention the word obligation. Could we work the idea of obligation into the first paragraph? It doesn't have to be in the first sentence, that just seemed an easy place to start. Perhaps the second or third sentence. Maybe (first sentence) definition, noting that options can be both bought and sold, (second sentence) rights granted by purchase, (third sentence) obligations incurred by selling. Seems the first para should give an overview of both sides of an options transaction. Yworo (talk) 16:25, 26 August 2010 (UTC)

I'm not opposed in principle. However, we already use the word "obligation" in the first sentence. I'm not sure I see how it would improve the paragraph by using it again. In addition, every financial instrument places obligations on the issuer - I'm not sure whether an article on one specific type of financial instrument needs to discuss that particular aspect in its first paragraph. If someone is unclear on what a financial instrument is, they can click on the conveniently place link to find out, couldn't they? Ronnotel (talk) 17:09, 26 August 2010 (UTC)

See what you think about my revision. Wikipedia is for the general reader. Presenting a definition that makes it clear that a contract being established rather than a thing to be bought will give the general reader a better insight into what is going on in an options trade. The general reader shouldn't have to follow links in the lead to get a clear understanding of the concept. Later in the article as it gets more technical, of course, but not in the lead. Yworo (talk) 17:48, 26 August 2010 (UTC)

Options scale

I come to this table with a link to an online program that displays the prices of the fundamental world's commodities, their options, the marks, a scale and a graph. My intention is to list it on this page for a week for your evaluation and comment. There is an explanation on my user page with the code to transfer the scale to a spreadsheet.

Alesander (talk) 05:19, 22 October 2010 (UTC)

thanks for the link, Alesander, but I'm unclear on how the tool you describe would meet the notability standard. In order to link to such a tool, it should be referenced and documented by reliable sources. That way it will be clear to all that the link is appropriate. Since I cannot find any reliable sources that reference this tool, I think it may be premature to add this link to the page. Ronnotel (talk) 13:11, 22 October 2010 (UTC)

+=, thanks.Alesander (talk) 15:30, 26 October 2010 (UTC)

please add

the idea is a simple summary of how they work; for me , this really works, and took me a long time to find; it is in the current article but sort of buried at the bottom, at the very least, this should come before the math stuff, which is of interest to very few people in a general audience

Options come in two varieties, calls and puts, and you can buy or sell either type.

If you buy a call, you have the right (but not the obligation) to buy the underlying instrument at the strike price on or before the expiration date.

If you buy a put, you have the right (but not the obligation) to sell the underlying instrument on or before expiration. In either case, as the option holder, you also have the right to sell the option to another buyer during its term or to let it expire worthless.

The situation is different if you write, or "sell to open", an option. Selling to open a short option position obligates you, the writer, to fulfill your side of the contract if the holder wishes to exercise. \

If you sell a call as an opening transaction, you're obligated to sell the underlying interest at the strike price, if you're assigned. If you sell a put as an opening transaction, you're obligated to buy the underlying interest, if assigned. As a writer, you have no control over whether or not a contract is exercised, and you need to recognize that exercise is always possible at any time until the expiration date. This is actually a little wordy, but to me, makes a lot more sense, in a short paragraph, then the current version, where this info is sort of diffuse and at the end of the article (move it up - way more people need to read this then the math stuff) —Preceding unsigned comment added by 75.67.134.245 (talk) 02:33, 11 November 2010 (UTC)

All of this is already in the lead section of the article. Yworo (talk) 03:24, 11 November 2010 (UTC)

NO IT ISNT it is buried

to see it done right, vist http://www.theoptionsguide.com/put-option.aspx I have a PhD in molecular biology, and I know how hard it is to simplify; I feel your pain, but the current article is dense, with way way way to much info sorry, thats my two cents

(of course, an objective measure would be to ask 100 people to read the aritcle and answer some questions on puts and calls, but I see no way to do that)