AC-DC Option - Explained
What is an AC DC Option?
Written by J. Mance Gordon
Updated at April 22nd, 2024
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What is an AC-DC Option?
An AC-DC Option is an option that allows investors trade (buy and sell) at a specified price but with no obligation. This means that investors have the right to trade at a specific price but are not mandated to do so, it is optional. AC-DC is a derivative and not the same as time to purchase. This option enables investors to make decisions as to whether to purchase or sell an instrument on a future date. AC-DC Option can also be a call option which is done based on the discretion and choice of the buyer.
How does an AC-DC Option Work?
AC-DC options are selection options. Quite a number of AC-DC options are European options, this option can be used the owner of an instrument for a period of time. Often, the exercise date and selling price are set in these options. AC-DC options are quite useful during market volatility, when a company's security is highly vulnerable, this option can be applied. The compensation method used for the analysis of sales options is also applicable to the AC-DC options but with little considerations. The profitability of a position, the ability of the investor to select payment, among other factors are considered when calculating compensation. Securities that are traded higher than the strike (market) price are more profitable than other counterparts, so also the compensation that the owner will receive.