• Global Frameworks: CFA Level 1 (Derivatives), CIMA Operational Level (P1).

1. Options Typologies and Exercise Styles
Options provide asymmetric risk mitigation.
  • Call Option: Gives the holder the right, but not the obligation, to buy an asset at a specified Strike Price (X) before or on an expiration date.
  • Put Option: Gives the holder the right, but not the obligation, to sell an asset at a specified Strike Price (X).
  • Exercise Styles:
    • European Options: Can be exercised only at the exact expiration date.
    • American Options: Can be exercised at any point up to and including the expiration date, offering greater strategic flexibility.

2. Moneyness Matrix States
Moneyness describes the relationship between the asset’s current spot price (S) and the option’s strike price (X):

Moneyness State Call Option Condition Put Option Condition
In-the-Money (ITM) S > X (Has intrinsic value) S < X (Has intrinsic value)
At-the-Money (ATM) S = X S = X
Out-of-the-Money (OTM) S < X (Intrinsic value is zero) S > X (Intrinsic value is zero)

3. Options Payoff Formulas and Diagrams
The total market premium (C) of an option consists of two parts: Intrinsic Value (the immediate profit from exercising the option) and Time Value (the premium paid for the potential value generated before expiration).

  • Long Call (buyer):
    Payoff = max(0, S_T − X)
    Net Profit = max(0, S_T − X) − C

    Long Put (buyer):
    Payoff = max(0, X − S_T)
    Net Profit = max(0, X − S_T) − P

Short positions (the option sellers or writers) have inverted payoff profiles, capturing the premium upfront but facing substantial downside if the market moves against them
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