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Published On: Mon, Feb 25th, 2013

Underlying Asset

An Underlying Asset, or Underlying, is the asset or security that the value of a derivative is based upon.

In other words, an Apple Call option has an intrinsic value that is based upon the value of Apple (AAPL – NYSE.) In this case an Apple Call option will increase in value as the price of AAPL rises in value.  If the derivative were an Apple Put option, the value of the Put would rise in price as the value of the Underlying Asset, in this case the equity AAPL falls in price.  While there are many factors that go into the trading price of an option, by far the greatest amount of this price is derived from the value of the underlying (hence the term derivative.)  The part of an option’s value that is tied to the Underlying Asset is called the intrinsic value of the option.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

 

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