This chapter presents a brief description of stock options, securities that confer to their holder the right, but not the obligation, to trade a security at or during some future time. In Section 16.2, definitions for European, American, and Bermudan puts and calls are presented.
Section 16.3 describes some of the uses to which these securities may be put, and some of the risks that can be mitigated or taken on through these uses. With this in mind, Section 16.4 outlines some qualitative behavior of European puts and calls. This chapter provides a good basis for the hedging and pricing arguments to be developed in the later sections.
A call gives ...