What is an Outright Option?
An outright option is a type of options contract that gives the buyer the right, but not the obligation, to buy (in the case of a call option) or sell (in the case of a put option) the underlying asset at a predetermined price (strike price) on or before a specified expiration date.
Unlike a spread option, which involves two different options contracts simultaneously, an outright option involves only a single options contract. This means that the outright option can be used as a standalone instrument for trading or hedging purposes.
Salient features of Outright options
Traded on an exchange
Outright options are available for trade on exchanges for the masses. It is used by both retail and institutional investors.
These options are available on various underlyings such as precious metals, stocks, agricultural commodities etc. Although an outright option explicitly refers to any basic option traded on a single underlying security.
The investors have the benefit of using leverage. They can use a small amount of money to take a big position as option traders do not have to pay the full contract value to take a position in the market.
Premium simply refers to the price paid to acquire an option.
In India only European style options are traded, which can only be exercised at expiry. However if one is trading in American style options, they can be exercised any time before expiry of the contract.
Options are predominantly used by traders for speculative purposes. If they are left unprotected from directional risk, on one side the risks in long positions are restricted to the premium paid, whereas in short positions the risks can be significantly higher.
4 possible positions in outright options:
Outright long call
On an outright long call option, the investor has a bullish outlook on the underlying. The buyer is required to pay the premium to the seller in order to acquire it. The buyer gains when a surplus remains after the premium is recovered. The break-even point for a long call is the sum of the strike price and the premium.
Outright short call
On an outright short call option, the investor has a bearish or range bound outlook on the underlying. The seller pockets the premium paid by the buyer. The seller gains when they retain the premium.The break-even point for a short call is the sum of the strike price and the premium.
Outright long put
On an outright long put option, the investor has a bearish outlook on the underlying. The buyer is required to pay the premium to the seller in order to acquire it. The buyer gains when a surplus remains after the premium is recovered. The break-even point for a long put is obtained by deducting the premium from the strike price.
Outright short put
On an outright short put option, the investor has a bullish or range bound outlook on the underlying. The seller pockets the premium paid by the buyer. The seller gains when they retain the premium. The break-even point for a short put is obtained by deducting the premium from the strike price.
|Point||Outright long call||Outright short call||Outright long put||Outright short put|
|Premium||Pays the premium||Pockets the premium||Pays the premium||Pockets the premium|
|High||Restricted to the premium||High||Restricted to the premium|
|Restricted to the premium||High||Restricted to the premium||High|
|Break even point formula||Strike price + premium||Strike price + premium||Strike price - premium||Strike price - premium|
Overall, outright options offer investors and traders a flexible and customizable tool for managing risk and generating profits in financial markets. However, they also carry their own risks and require careful analysis and risk management to be used effectively.