A Brief Review of Option Pricing

Definitions:

• Call Option: the option to buy an asset on a specified date (the exercise date) for a specified price (the strike or exercise price).
• Put Option: the option to sell as asset on a specified date (the exercise date) for a specified price (the strike or exercise price).
• European Options: are options that can be exercised only on the maturity date.
• American Options: are options that can be exercised on any day up to and including the maturity date of the contract.
• Options are known as derivatives because their value is derived from, or is contingent upon, the value of some other asset.
• Every option purchased has someone on the other side who "wrote" the option. (Financial options are a zero-sum game.)