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What is an Option Class?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 30 June 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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An option class is the range of call and put options that are associated with a given investment. Several different types of investments may offer this range of options, including index funds, some types of futures securities, or even a specific stock. The range of options that are found in the same option class will vary, depending on the nature of the underlying instrument, the particulars of the company that issues the option, and the conditions in the market or markets where that asset is traded.

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Considering the nature of an option class associated with a given investment opportunity can provide valuable clues into how investors can exploit those options in the most productive manner. Careful consideration of each of the options found in the class can make it easier to understand the past and current activity as it relates to options to buy as well as options to sell. When comparing these options to sell, or puts, with the options to buy, or calls, investors can look toward the current market conditions and determine which of the two actions is likely to generate the most return. Looking closely at the current range of options in an option class can also make it easier to understand if no particular action should be taken at the present time. This means that the investor may respond by either by holding onto the investment without exercising a put or call, or by choosing to refrain from purchasing the asset under consideration.

Looking closely at the option class associated with a given investment vehicle can also help an investor understand if a given investment fits in well with his or her financial goals. This includes evaluating the degree of volatility associated with that asset and the practicality of buying that investment with an eye toward exercising one or more of the available options in the future. By carefully projecting the outcome of each of those actions, the investor can determine if the risk involved is within reason and if the potential return is equitable in comparison to that risk.

While at one time this evaluation of an option class was helpful mainly with short-term investment decisions, that is no longer the case. With the ability to more accurately project long-term movements in the marketplace, considering each of the options in the class and their potential over periods of a year or more is much more common. Assuming that the investor accurately predicts the trends within the marketplace for the time period under consideration, it may be possible to determine when to exercise which option related to a given asset, creating a chain of transactions that ultimately generate a significant amount of returns for that investor.

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