An option is a contract, which provides for the right of the option holder to buy (Call) or sell (Put) the underlying asset in the specified period and at a certain price, this price is called "strike".
The obligation of the option seller is, to sell or buy this asset on the option exercise date at a specified price.
Time to expiration When buying a longer-term option, we have less risk, but this position will be less profitable if the market moves in our direction. The fact, that the reduction in the cost of an option under the influence of time is maximized as the expiration date approaches. Ie.
Obviously, buy options and wait, when will the BA trend start, in a situation, when time is running against your position, not optimal solution. It is more logical to buy options after, how an upward or downward movement in a futures has already begun, and not before the start of this movement<
Risks of buying options (Long Call и Long Put) In one of the past lessons, we briefly touched on, so-called, three-dimensionality of option trading. Three factors affect the option position: BA price dynamics, time to expiration and volatility.
Let's take a look at the price chart of a “blue chip” stock such as Sberbank.. Let's admit, current share price 138,44 ruble. Seems, that after such a strong growth of the stock, a correctional movement is possible. To capitalize on a possible decline, we buy a Put option on a futures on Sberbank ATM shares with a strike 14 000 by price 349 rubles.
One important point to note. Let's now simulate the position from the previous lesson In any option analysis toolkit, we see two position profiles: 1. Expiration profile is that profile, which is depicted by the green line 2.
Risk / reward ratio As we already know, option buyers' risk is limited by the premium, but there is no potential profit. When buying a Call option, our profit is not limited in the event of an increase in the price of the underlying asset (futures)
The second distinguishing characteristic of options is the so-called multidimensionality or (applicable to futures-style options in Russia) three-dimensionality. When trading options, it is not enough to worry about the movement of the underlying asset and make decisions only based on the price chart of the underlying asset..
The first important difference between options is the non-linear nature of the instrument.. Most newbies, usually, come to the options market from the world of line instruments (stocks or futures). On these instruments, the size of the profit is equal to the size of the loss with the same increase or decrease in the price..
Prize (price) an option on the market consists of two components: 1. Intrinsic value of an option. This is the amount, which we will receive, if we are now expiring the option and close the position in the underlying asset at the current market price. Example. Futures on an ordinary share of Sberbank costs 14 000 rub. и Long Call 13 500 (Bonus = 830 rub.).
1. in money (ITM – in the money) For this option, its exercise allows you to either buy the asset cheaper, what is it on the market now, or sell it for more. Example: Futures on an ordinary share of Sberbank costs 14 000 rub. (100 Shares) – 120 Call (we have the right to buy shares at 120 rub.) And 160 Put (we have the right to sell shares at 160 rub.) 2. on money (ATM – at the money) The strike of this option is approximately equal to (closest) to the BA price. The so-called central strike (remember this concept, it will be used frequently). In this way, exercising this option does not give any advantage, because. the asset price on the market is approximately the same. 140 Call and 140 Put 3. out of money (OTM – out of the money) For this option, its execution is not profitable, because. does not allow you to buy an asset cheaper, what is it on the market now, nor sell it for more. In this case, it is easier to buy (sell) underlying asset in the market, than under the terms of the option. 160 Call and 120 Put Начинающие трейдеры очень часто неправильно думают, что если опцион ITM, then it is profitable, and if OTM is unprofitable. This is wrong. And here are two examples. Example 1. Let's admit, futures on an ordinary share of Sberbank costs 14 000 rub. …
LESSON 18. CLASSIFICATION OF OPTIONS DEPENDING ON STRIKE Read more