Posted in Finance, Accounting and Economics Terms, Total Reads: 458
Definition: Cash Based Option
These are the option contract which is settled in cash. The option contract provides the flexibility to the owner of the contract to either exercise the right or let it expire. For example the writer or the seller sells a call option at price 50. The owner of the contract pays a premium for the contract. The premium is provided as the flexibility provided to the owner of the contract.
Now suppose the price of the stock doesn’t rise and stays below 50. The owner will not exercise the right and lets the contract to expire. But suppose the price rise to 55 and also covers the premium paid by him, then the owner will exercise the write. In normal case he would buy the shares at 50. In this case he would exercise the right and get 55 for the share. The whole transaction will be done in case and immediate liquidity will be provided.