A series of posts about the tools we can use in the stock market — option

A series of posts about the tools we can use in the stock market — option

An option is a contract that gives the right to take or give away a chosen asset at a set price during its validity period. With the conclusion of an option contract, the opportunity is bought to carry out an action with an asset at a predetermined price (strike). The term of the option, when you need to carry out some action — expiration. At the moment, the terms of the option agreement are either fulfilled or not fulfilled. Failure to exercise will cost a certain amount, which is called the option premium. It depends on the strike, the market valuation of the asset.

It is worth noting that the option only gives the right, but does not oblige, to sell / buy an item at an agreed price. Like stocks, an option is also an investment paper. It imposes legal obligations on the parties and has its own properties.

Let me explain the essence of the option in simple words using an example: A person wants to buy a house and has found a suitable option. At the same time, there is no money yet, but in a couple of months they will be. To reserve the house for himself, the buyer negotiates a deal with the seller: two months later, the seller gives him the house for 2 million rubles. As a deposit, the buyer leaves the amount of 100 tr.

After the conclusion of such an agreement, there can be three situations:

• Money appears. The buyer gives them to the seller and the deal is concluded.
• It turns out that a famous director grew up in this house and the market value of the house soars to 5 million rubles. The owner of the house, since he has entered into a contract and taken a deposit, is obliged to sell it at the agreed price. The buyer, having given 2 million rubles. for a house, can sell it at a market price of 5 million rubles. and earn 3 million rubles.
• After examining the house, it turns out that the house is in disrepair, the basement is infested with mice, and the roof is falling apart. The market value of such a house is not more than half a million. In this case, the buyer may refuse to purchase. But since the contract was concluded, the buyer loses only the deposit.

This is the essence of the option. By purchasing it, there is a right to purchase the selected asset, but this is not an obligation. You can wait for the expiration date and not use the right you have received. In this case, the amount spent on the purchase of the option (collateral) is lost.

1. How do options work?

To understand the essence of the work, let’s give an example: there is an assumption that the shares of Romashka LLC will rise, but there is no complete certainty in this. In order not to take risks and not buy shares right away, you can take an option for the desired period and at the price that the investor plans to see. The seller will be obliged to give the goods at a fixed price. At the conclusion of the contract, a deposit is paid. If prices suddenly fall, then the buyer has the right to refuse to buy these shares, but will lose the collateral. Here the risk is limited only by collateral.

The seller, on the other hand, risks that the asset may rise in price, and he will have to give it back at the price that is in the option. That is why the sellers are large sites that can compensate for such losses. Both large and small investors can be buyers.

2. Types of options.

Depending on the direction of trading, options are divided into:

• “Put”. This option contract gives the right to sell an asset at an agreed price. If an investor wants to protect his assets from a price fall, then he should issue a put. This is a short position. The buyer expects the price of the option to fall before the option expires.
• “Call” — certifies the right to purchase at a specified price during the validity of the option. This is a long position. The buyer of a call will expect the value of the option to rise.

3. Options differ in style:

• American. Here, the option can be exercised at any time during its life.
• European. This option is exercised only at the end of the term.
• Asiatic. The option is exercised at the average price. The strike is calculated as the average value of the option price over the entire period of its life.

4. Based on the types, there are four types of option trades:

• Buying a call. The transaction is carried out when there is an assumption that the asset will grow. At the moment it costs 1 thousand dollars, and in six months the price is expected at the level of 1.5 thousand dollars. .5 thousand dollars.
• Call sale. The transaction is carried out when there is an assumption that the asset will not increase in price. The seller assumes that the buyer will not apply for the exercise of the option and will be forced to leave a deposit
• Buying puts. A trade is used when an asset is expected to fall in value. Now it costs 1.5 thousand dollars.., and in a month it will cost 1 thousand dollars… The seller buys an option with a strike price of 500 dollars.., and the buyer will be forced to buy it at 1.5 thousand dollars. .
• Sale of puts. Here again, the profit is limited by the size of the deposit. The seller expects the price to fall and hopes that the buyer will not exercise the option.

Outcome:

In my opinion, for conservative investors, the only use of options is to hedge other positions. As the main tool, options are the lot of high-risk strategies for traders, but what is worth noting is a very, very high-yielding tool.

4.Total (on a scale of one to ten):

• Investment security — 1
• The minimum level of knowledge for investing is -10
• Potential income — 10
• Need for control — 10
• The threshold for the minimum investment amount — 8