There are two types on the market now options – Call (Call) and The road (Put). And it is with them that all transactions on the options market are made.. They are similar in their properties., but act exactly the opposite in relation to each other.
Options were originally created for hedging, that is, minimizing losses from an asset price movement up or down. And this is where the main difference lies. Call and The road options.
Option Call (Call) – this is, in simple words, same, like a long position in stocks or Forex. This option gives the holder the right (exactly right, no obligation!) buy a specific asset at a predetermined price at a specific point in the future, which is also called the moment of expiration or expiration option. By itself, the holder of such an option will benefit from, if the asset price goes up, because then it will be possible to either redeem the asset at a price below the market price at the moment, either sell the option for good money and make a profit out of it. Therefore, the buyer Call option at the time of purchase must be sure, that the price will go higher.
As a hedging instrument, option Call designed to insure against excessive price increases. for example, if a person opened a short position on any underlying asset, let's say gold, then it will be unprofitable for him to increase the price. but, if the same person also owns the option Call of gold, then its losses from the upward movement of the underlying asset will be offset by the profit from the upward movement of the option price.
Option The road (Put) – acts exactly the opposite, that is, it is very similar to short positions on, let's say, stock. Put-option gives the right to its owner to sell the specified asset at an agreed price at a certain point in the future. The holder of such an option benefits from, if the asset price goes down, to sell the asset above the market price in the future.
Option The road designed to minimize losses from a decrease in the price of the underlying asset.
Optional (lat. optio - choice, a wish, discretion) - contract, by which option buyer (potential buyer or potential seller of the underlying asset - commodity, securities) gets the right, but not an obligation, to make a purchase or sale of this asset at a predetermined price at a certain moment in the agreement in the future or during a certain period of time. In this case, the seller of the option is obliged to respectively sell the asset or buy it from the buyer of the option in accordance with its terms.
Option is one of the derivative financial instruments. Distinguish between put options (put option), to purchase (call option) and bilateral (double option). Options and futures are largely similar financial instruments, but have some fundamental differences. In a futures transaction, the buyer must purchase (or sell) expiry asset, whereas with an option, he can refuse it.
In total, the options market has 4 type of traders:
- Option Buyers Call
- Option sellers Call
- Option Buyers The road
- Option sellers The road
An option is the right to sell or buy the underlying asset, not a duty, ie. option buyers are not required to sell or buy the underlying asset, however, the sellers of the option may be required to buy or sell the underlying asset, if requested by the option buyer.
Since Call and Put options are essentially derivatives, or as they say "derivatives", then their value is a derivative of the price of the second financial instrument, underlying them. As you most likely guessed, all the same currencies act as these instruments, products, stock, stock indices, bonds, futures contracts and the like.
Example of buying options
Let's take an example, to make it clearer. Suppose, You have purchased shares for a specific period. But at the same time, there is a possibility that, that the value of these shares will begin to decline. You choose the classic path and set defensive orders, limiting losses. But here, too, there is another big "BUT" - the likelihood that, that your protective orders will work, and the value of the shares you purchased will grow in the future - it is not at all great. Eventually, You can drain your deposit.
This price is determined, factors such as volatility, strike price, value of the underlying asset, time value and others - they all participate in the formation of the value of option contracts.
In the event of an increase in prices for the shares you have purchased, let's say before 120 rub / piece, Your profit 16 rub., that is, 12o-1oo-4 = 16.
And in the case of a reduction in the price of shares down to zero, You will lose only 4 rubles. (amount of premium). During a price decline, You can simply exercise the option and then sell the stock at the purchase price., that is for 100 rub. In this case, the price at which the contract will be executed, called the strike price. As you can see, protecting your positions with options is obvious.
Features of Call and Put options. What is important to know here?
The options market is considered the most difficult today, hidden and uncontrolled segment, therefore, in order to understand it, you need to know some basic concepts.
So those, who buy Call and Put options, called option holders (otherwise: option buyers, holder или buyer).
They are not required to sell, or buy back the underlying assets. They always have a choice - you can use or not exercise the right to provide assets. Moreover, those, who sells call options (Call) and put options (Put) are required to sell or redeem the underlying assets, if requested by option holders. In other words, option sellers may be required to (at the request of buyers) keep your promises, that is, sell or repurchase the underlying assets at predetermined prices.
Option holders enter into contracts with sellers (writer, seller). During the conclusion of contracts, holders pay sellers the value of the options (the prize). And this is a kind of payment for the possibility of the right to purchase / sale of assets in the future.
- Transactions in which the option holder buys or sells assets, in common use are called EXECUTION OF OPTIONS.
- And the amounts, by which they buy ours / sell assets, are named PERFORMANCE PRICES.
Why Options Trading, this is a limited risk in advance?
According to investors, purchase of options, this is an investment of capital with a predetermined, limited risk. This risk, or rather, the payment for leaving it is the option price for buyers. In other words, investors pay for the options and thereby transfer all risks to their sellers.. Wherein, from the buyer's intentions, options are divided into types. Let's consider in more detail.
Call options (Call) and Put (Put), terms of their execution and types
so, what types of options exist and how to work with them? Options differ in actions, that is, according to the intentions of their buyers and are subdivided into Call options (Call) and put options (Put).
Also, there is such a concept for a Call option, as "cash asset»- when the value of our underlying asset is higher than the strike value, and also "out of the money option", in such cases, the value of the underlying assets is lower, than the strike price.
Put options, can also be "out of the money options", when the asset price is below the strike and out-the-money value, when the opposite situation is observed - the prices of the underlying assets are higher than the execution cost.
Also, there is such a concept, as "money option». In such cases, the value of the underlying assets is close to the strike value. And here is the intrinsic value of options (she: intrinsic value), this is the amount in which the options are still in the money.
Among other things, Call and Put options are distinguished by the timing of their execution:
European type of options, they are European options. This type of options makes it possible to make deals exclusively on the last day., in which the option is still valid;
American type of options, or American options. This type of options, allows you to both buy and sell them at any time of the contract.
By asset type, Call and Put options are distinguished by:
- Stock options. Here, the buyer of these options either sells or buys shares;
- Foreign exchange options. This view, allows you to sell or buy foreign currencies;
- Commodity options. These options, give the right to purchase and sell and buy a certain amount of commodity assets (drag. metals, energy carriers and the like).
The most common options are of two types: American and European.
- American option can be redeemed any day before the option expires. That is, for such an option, the period is set, during which the buyer can exercise this option.
- European option can be redeemed only on the specified date (Date of Expiry, due date, maturity date).
Option premium Is the amount of money, payable by the buyer of an option to the seller upon entering into an option contract. In its economic essence, the premium is a payment for the right to conclude a deal in the future..
Often, saying option price, imply an option premium. The premium of an exchange option is a quote for it. The amount of the premium, usually, is established as a result of the equalization of supply and demand in the market between buyers and sellers of options. Besides, there are mathematical models, allowing to calculate the premium based on the present value of the underlying asset and its stochastic properties (volatility, profitability, and t. d.). The premium calculated in this way is called the theoretical option price.. Usually, it is calculated by the organizer of trades or broker and is available together with the quote information during trades.
Most popular optional models
- Black - Scholes model (Black-Scholes)
- Binomial model
- Heston model
- Monte Carlo method
- Bjerksund-Stensland model (Bjerksund-Stensland)
- Cox-Rubinstein model (Cox-Rubinstein model)
- Yatsa model (Yates model)
Option contract, at the conclusion of which the type of the underlying asset is stipulated, contract scope, purchase or sale price, type and style, called standard (standard) or "Vanilla" option (plain vanilla option). With the development of the market, additional variables were included in the terms of option contracts in response to buyers' requests, risk-related, which they would like to hedge with options. As over-the-counter the options market is flexible, then additional reservations were simply reflected in the value of the premium, decreasing or increasing it.
Particularly successful inventions began to be offered on the market in large quantities. This is how non-standard (non-standard) or exotic options (exotic options or just exotics). The time of the emergence of the exotic options market is considered to be the end of the 80s..
- Asian Option
- Barrier option
- Binary option
- Range Option
- Complex option
Automatic option exercise
In most countries, the legislation in exchange trading does not regulate the procedure for exercising options, therefore, some exchanges introduced automatic execution of options in the form of cash settlement. This procedure eliminates the risks, associated with late filing of an application for the exercise of options. For instance, on the Moscow Exchange, the automatic exercise of options appeared in 2015 year.
How an option differs from a futures?
Option and futures are quite similar exchange trading instruments. But each of them has its own characteristics.. Futures is considered a simpler instrument. So, entering into a futures contract on the exchange, a trading participant takes into account only one amount - the price of purchasing a futures at trading. This figure, when dividing it by a lot of a futures contract, will make it possible to determine the immediate value of the asset itself. The amount of the guarantee is fixed in the document and remains unchanged.
The situation with options is much more interesting.. The buyer and seller agree in advance on the execution price of the option contract, that is about, how much the asset is expected to be worth. This amount is called the strike (strike price). If a trader wants to make a profit, then the value of the underlying asset must be greater than the strike value, if it's a call option. AND, opposite, to make a profit, the price must be less than the strike, if it's a put option But the strike is not the right amount, which, if the transaction is completed, the seller will receive. The strike price is often not the same as, how much the underlying asset is actually worth at the time of the transaction.
The exchange provides the trader with a choice of a whole range of numbers during the execution of the transaction. The actual price of an option is a premium, paid for the right to buy or sell an asset and is the main subject of exchange trading Its price is determined by the market, not a stock exchange. Therefore, traders have the opportunity to negotiate and indicate the amount of the premium, which they wish to earn on the deal.