analysis

Definition of Option. What are the key differences between call and put option contracts? How to earn an investor on this financial instrument? What is the essence of option contract execution?

What does an option consist of?
Imagine a situation: in six months you will need grain for agricultural work. Now the price for it is 100,000 rubles, but what will happen in 6 months? In order not to take risks, you conclude a contract with the supplier: you pay 10,000 now, and at the appointed time you buy the raw material for 100,000 rubles. Even if the cost of the commodity rises, you have the right to get the grain for the appointed price. This is the essence of an option.

An option is an instrument that allows you to lock in the current price of an exchange-traded commodity and, if you wish, buy it at that price at a given time.

 

The structure of an option is similar to a nesting doll. It is always based on an underlying asset: on the Moscow Exchange, this is a futures contract, which is also concluded for a certain commodity. It turns out that the buyer of an option does not receive the product specified in the contract, but only the futures for it.
If we consider the example above, the underlying asset of the option will be the grain futures contract. And the underlying asset of the futures is the raw material itself. And it is not necessary to buy it after the transaction: together with the option you get the right to purchase the commodity, which you can use or not.
How to trade options on the stock exchange?
Although options are traded on the stock exchange in the same way as securities, the principle of their work is different. Let’s look at the basics that a future investor should know before investing money.
For the convenience of calculations, options are valued in basis points. This is a kind of alternative to currency, matching its equivalent. For example, if a share costs 100 rubles, then its option is 100 basis points.
The price of the underlying asset, which depends on the currency, is calculated by the broker in basis points according to a certain formula.
To buy an option, it is not necessary to have the entire amount in your account to buy the contract. It is enough to have a security deposit, which is an amount either equal to the premium or slightly more than it, which the broker will block to pay for the option.
Let’s consider the principle of work of options by example
Let’s say your goal is to buy 1,000 shares at 300 rubles each and sell them, making a profit from the growth of the securities. To do this, you will need to have collateral in your account (approximately 10,000 rubles), since this option is equal to 100 shares.
On the appointed date, some options will be exercised, while others will not. Everything depends on the value at that moment of the futures underlying the option.
On the exercised options, futures purchase transactions will take place. They will be executed at the price that is stated in the option specification. Let’s say the price of your shares increases by 20 rubles per unit, then you will earn 20,000 rubles. If the price falls, your loss will be 10,000 rubles, which is the amount of the premium paid.
What comes in on the exercise date of an option contract?
Options are quarterly, monthly and weekly. Therefore, their with the futures expiration may not occur at the same moment, but different ones. Then the option holder gets an assigned position in the futures. He also has the right to sell the option even before delivery of the underlying asset. If the expiration dates coincide, the investor receives the futures settlement and the unlocked GO.

The difference between call and put options in simple words
Options come in two types: call and put. Let’s see how they differ.
Buying a call option. When you buy a call option (also called a call option), you get the right to purchase the underlying asset at a fixed price within a specified period. How it works: you buy the option in the hope that it will increase in value during the specified time, and the commodity will be available at the same value.
Selling a call option. The seller of such an option undertakes to realize the number of units of the asset specified in the contract at a value that is also specified in the option. At the moment of the contract conclusion he receives a premium – this is his income from the transaction. If the price of the underlying asset rises, the seller will lose his profit.
Buying a put option. Such an option gives the owner the right to sell the asset at a specific price. At the time of the transaction, the buyer pays a premium – it is the seller’s income. And the buyer’s profit depends on the value of the underlying asset: he will receive it if the price decreases.
Selling a put option. The seller must buy a certain amount of the underlying asset at the price specified at the time of the transaction. For this, he receives a premium. But as soon as the price of the asset starts decreasing, he will lose his profit.
A put option or put option gives the owner the right to sell it at a specific price before a certain time. While in the first case the buyer waits for the growth of the asset, in this option the seller predicts its fall and capitalizes on it.

It is worth remembering that options imply only the right to buy options. This means that after the expiration date, players are not obliged to make a trade if they do not wish to do so.

 

Why buy these securities?
There are several ways to benefit from buying options.
1. To profit from changes in the price of the underlying asset
With the help of options, you can significantly reduce your risks without purchasing the commodity itself. With this investment, you will have the opportunity to wait for the right moment before the expiration date and only then make a transaction.
2. Fix the price of assets
If there is a shortage in the market, you, as the buyer of the put option, will be able to sell the goods at the agreed value and get income from the price difference.
How to make money on any stock market movement?
Before entering the stock market, you need to decide which strategy you will follow. The final choice will depend on the investor’s needs, his willingness to take risks and other factors. By analyzing them, you can pick what is right for you.
Selling covered call options. This strategy is characterized by the lowest degree of risk. Its essence is that after buying options, you sell them either to generate income or to get rid of potentially unprofitable assets. And if their price does fall, you can abandon the deal, losing only the premium.
Generate income by buying call and put contracts at the same time. Some investors minimize risks by buying different types of options. This way they get the opportunity to earn at any outcome of events. But only if the price of the asset is as far away from the strike price as possible.
How does the price of an option change depending on the change in the underlying asset?

To begin with, let’s analyze what the value of an option consists of. It has several components: the price of the underlying asset, the strike (the price of the option, which is specified in the contract) and the time remaining until the end of trading.

Of all of these, the value of the underlying asset is the most important factor affecting the pricing of an option. The more expensive it becomes, the higher the call option rises. A put option, on the other hand, will go down.

Let’s say that a share is now worth 100 rubles. If you want the right to buy it at the same price in six months, it will cost more than the same offer, but at 150 rubles. And you will have to pay an even higher amount to buy this share at 90 rubles. This is due to the forecasts that the other investors are putting up.

Risks of option trading
1. Compared to investing in shares, options trading is a more risky way of investing finances
After all, while stocks can be left in the portfolio until they grow in value, such a strategy is impossible with options: each of them has an expiration date.
2. Forecasting plays an important role in option trading
In order to make a profit, you will have to study the market in detail and calculate which trade can bring you income. You will also have to constantly monitor the value of options.
3. It is important to take into account that when investing in stocks, you get the right to sell or buy the security
And by entering the options market, you acquire obligations that cannot be avoided. That is, if you have made a deal to sell, you will have to fulfill it in the specified period. Otherwise, you will lose the amount of the premium.

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