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Common use of Option Premium Clause in Contracts

Option Premium. The amount of the option premium or the rate of an option or the option price comprises the so-called intrinsic value of the option and the so-called fair value. The intrinsic value of an option is the difference between the current rate of the option item and the strike price of the option. Thus, for example, a call option on the DAX at a strike price of 4,000--with the DAX at 4,300--has an intrinsic value of 300 index points. A put option on the DAX at a strike price of 4,500--with the same DAX--has an intrinsic value of 200 index points (4,500-4,300). Hence, the larger the difference between the current rate and the strike price, the higher the intrinsic value and thus the more expensive the option. In addition to the intrinsic value, the option has a so-called fair value. The fair value is determined based on the difference between the actual rate of the option and the intrinsic value. For example, if the DAX is at 4,300 and a call option with a strike price of 4,000 is agreed upon and if the price of the option is at 450, the price of 450 exceeds the intrinsic value of the option, which is 300 points, by 150 points. In that scenario, the option has a fair value of 150 points. The fair value of an option depends primarily on three factors. An option with a residual maturity of several months, e.g., six months, must have a higher fair value than an option with a residual maturity of only one months since, in the first case scenario the option may be exercised five months longer than in the second case scenario. Volatility reflects the frequency and degree of price fluctuations. For example, if the item on which the option is based experiences a fluctuation of 20% or if a fluctuation of such extent is expected in the future, this option will have a higher fair value than the option on a stock which has an annual fluctuation of, for example, 5% or for which such a fluctuation is expected; this is due to the fact that the higher fluctuation range results in the option buyer having a higher chance of an increase in value of the option during the residual maturity. In the money: The option is “in the money” if the price of the underlying asset exceeds the strike price in a call option or is below the strike price in a put option. This scenario is also referred to as “in the money” option. At the money: An option is an “at the money” option if the option's strike price is identical to the price of the underlying asset. Out of the money: In this scenario, the strike price in a call option exceeds the price of the underlying asset, while the strike price in a put option is below the price of the underlying asset, with the result that the option does not have any intrinsic value. In this scenario, the option is a so-called “out of money” option.

Appears in 3 contracts

Samples: Client Agreement, Client Agreement, Client Agreement

Option Premium. The amount of the option premium or the rate of an option or the option price comprises the so-so- called intrinsic value of the option and the so-so- called fair value. The intrinsic value of an option is the difference between the current rate of the option item and the strike price of the option. Thus, for example, a call option on the DAX at a strike price of 4,000--with the DAX at 4,300--has an intrinsic value of 300 index points. A put option on the DAX at a strike price of 4,500--with the same DAX--has an intrinsic value of 200 index points (4,500-4,300). Hence, the larger the difference between the current rate and the strike price, the higher the intrinsic value and thus the more expensive the option. In addition to the intrinsic value, the option has a so-called fair value. The fair value is determined based on the difference between the actual rate of the option and the intrinsic value. For example, if the DAX is at 4,300 and a call option with a strike price of 4,000 is agreed upon and if the price of the option is at 450, the price of 450 exceeds the intrinsic value of the option, which is 300 points, by 150 points. In that scenario, the option has a fair value of 150 points. The fair value of an option depends primarily on three factors. An option with a residual maturity of several months, e.g., six months, must have a higher fair value than an option with a residual maturity of only one months since, in the first case scenario the option may be exercised five months longer than in the second case scenario. Volatility reflects the frequency and degree of price fluctuations. For example, if the item on which the option is based experiences a fluctuation of 20% or if a fluctuation of such extent is expected in the future, this option will have a higher fair value than the option on a stock which has an annual fluctuation of, for example, 5% or for which such a fluctuation is expected; this is due to the fact that the higher fluctuation range results in the option buyer having a higher chance of an increase in value of the option during the residual maturity. In the money: The option is “in the money” if the price of the underlying asset exceeds the strike price in a call option or is below the strike price in a put option. This scenario is also referred to as “in the money” option. At the money: An option is an “at the money” option if the option's strike price is identical to the price of the underlying asset. Out of the money: In this scenario, the strike price in a call option exceeds the price of the underlying asset, while the strike price in a put option is below the price of the underlying asset, with the result that the option does not have any intrinsic value. In this scenario, the option is a so-called “out of money” option.

Appears in 1 contract

Samples: Client Agreement