If I have a call option, which I long, with a strike price say, AUD 1.5/$, in english, is that "the right to buy 1$ for 1.5AUD" or "the right to buy 1.5AUD for 1$"? Please help me :)
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The strike price is the price you wish to purchase the item at.– BevynQCommented Jun 14, 2016 at 8:11
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An option is a contract. A call option is a contract that allows me to purchase a stock or commodity at the strike price. If the commodity moves to a price in open market greater than the strike price, I still get to buy the commodity at the strike price (and I am very happy). I don't understand your $ and AUD thing. Are you talking currency futures? Thats a bit different.– zipzitCommented Jun 14, 2016 at 8:30
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Why have you purchased an options contract that you do not understand? Look at the underlying forwards rate and compare it to the premium and you should be able to infer the relationship you wish to understand.– not-nickCommented Jun 14, 2016 at 17:22
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@NickR We get a lot of theoretical questions; I don't think it's fair to assume that OP already purchased the option.– TainToTainCommented Jun 14, 2016 at 20:32
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@TainToTain That's a very good point. I seem to have misinterpreted the OP.– not-nickCommented Jun 14, 2016 at 21:10
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1 Answer
Either option could exist, so you should be clear whether the underlying is USD or AUD. I will base my answer only on what you have written.
Normally the strike price is expressed in terms of the price of the underlying. The currency in the denominator is the underlying (you get one unit of it) and the currency in the numerator is the numeraire (what you pay to get a unit of what's in the denominator).
The way you have expressed it, one USD has a cost of 1.5 AUD. I would say, then, that the underlying is a USD. You therefore have "the right to buy one USD for 1.5 AUD." If the spot price rises above the strike, that would mean it costs more than 1.5 AUD to purchase a single USD. In other words, dollars are becoming more expensive (stronger) and your call option is in the money.
For the opposite option, the strike price should be quoted in terms of USD. In other words, if AUD was the underlying, its price would be 0.67 $/AUD.
TL;DR answer: when a strike price is given, the thing after the slash is what you have the right to buy with a call option.
