Trading Bermuda Style Options

Trading Bermuda Style Options

By www.options-trading-education.com

An options style that falls
halfway between American
style stock options and

http://www.options-trading-education.com/7069/trading-bermuda-style-options/

European style stock options
is trading Bermuda style
options.


Trading Bermuda style options
happens with
stocks, futures, and, especially
, interest rate swaps.


How does it fit “halfway”
between the other two styles?


One can execute American
style stock options at any time
during the contract period of
the option.


One can only execute a
European style contract at
expiration.


When trading Bermuda style
options, an options buyer has
a number of specific dates on


which he can execute the
contract up to and including at
expiration of the contract.


Buying and Selling Puts and
Calls when Trading Bermuda
Style Options


Aside from the issue of when
one can execute the
contract, trading Bermuda
style options works like other
options trading.


Traders can either buy or sell
an options contract.


Contracts are either puts or
calls. A put gives the buyer the
right to execute the contract
and sell the equity underlying
the contract.


A call gives the buyer the right
to execute the contract and
buy the equity underlying the
contract.


In each case the seller of the
options contract is obligated
to buy in the case of a put and


sell in the case of a call
depending on the wishes of
the buyer.


The seller is paid to take this
risk. The value of an options
contract is based on the fact


that the contract specifies the
price at which the underlying
equity will be bought or sold if
the buyer so chooses.


If a buyer of a call contract
buys an $80 call on a stock
that currently trades for $80
he will pay very little.


This is because if he turns
right around and executes the
contract and then sells the
stock he will not make any
money.


If the price of the underlying
stock goes up, the buyer may
want to execute the contract


in order to cash in on his
gains, fearing that the stock
might fall again.


With an American style
options contract this is always
possible.


With a European style
contract it is not possible until
expiration. However, when
trading Bermuda


style options, there will be a
set of dates prior to expiration
on which the trader can
execute in order in order to
pocket his profits.


Likewise with puts, the trader
can take advantage of a fall in
stock price and execute on a


date specified by the options
contract when trading
Bermuda style options.


Contract Value when Trading
Bermuda Style Options


Options buyers try to pick the
most advantageous times for
execution of options trades.


The value of the options
contract depends on the price
specified in the contract and
on the current market price of
the underlying.


It also depends on the amount
of time remaining until
expiration.


This is called the time value of
the contract. When the
market believes that a stock


may well move up in price this
time value may be substantial
in bringing up the value of an
options contract.


Taking advantage of market
sentiment as regards time
value when trading Bermuda
style


options lies halfway between
the situation for American and
European style, better than
European and worse than
American.


With these basic options
trading facts in mind be aware
of the differences when


trading Bermuda style options
instead of American or
European.


Trading Bermuda Style Options

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Trading Bermuda Style Options