Buyer's option. What is an option in simple words, their types and application
This article will focus on real exchange options - instruments highly qualified Russian stock market (not to be confused with, which in Russia are essentially a scam). These options are traded in the derivatives section of the Moscow Exchange. This section is otherwise called the FORTS derivatives market.
So, what are options– these are unique instruments of their kind, in which there are no strict obligations for the option buyer! The BUYER of an option pays a certain price for the option, and in return receives a right, not an obligation, but a RIGHT, which he can use or not at his discretion. This right, which the option buyer receives, opens up enormous opportunities for him in the form of building various strategies (speculation, arbitrage, hedging), we will talk more about these strategies below.
But the option can also be sold... What are options for the SELLER? These are instruments for which certain obligations already arise, and the seller’s obligations arise only if the buyer decides to exercise his right, i.e. its obligations depend on the buyer's decision.
The question arises: what is the point of selling an option at all if the seller only has obligations? And the point is that the seller, at the time of selling the option, receives a certain guaranteed amount of money, which will definitely remain in his pocket regardless of whether the buyer exercises his right or not. This “certain amount” is called the option premium (or price), so when selling an option, the seller receives this very premium and, by and large, hopes that the buyer will not exercise his right. Those. The option premium will be the final earnings of the seller (aka the maximum possible income).
If the buyer decides to exercise his right, the seller’s financial result will be negative. Therefore, the seller of an option always runs the risk that the negative result that will result from fulfilling the obligation will exceed the profit that he earned in the form of the option premium. Consequently, the risks for sellers of these instruments are always much greater than for buyers.
The buyer risks only the final premium paid, while he can earn absolutely any money, depending on how profitable it will be to implement the transaction for which he has received the right. This means that the buyer’s risks are always limited and closed, but the possible profit is not. The seller always has limited profits, but possible losses - no. Next, we will look at what options are in terms of its parameters, i.e. what parameters do these tools have?
Main parameters of options
Underlying asset
What are stock options or what are commodity options? The meaning of this parameter lies in the answers. At its core, an option is a futures contract with specific conditions, the main one of which is the actual subject of the transaction itself. Such a “subject” of the transaction can be absolutely any exchange instruments: stocks, bonds, oil, gold, futures, indices, etc. The underlying asset is precisely the instrument, the “subject of the transaction” that underlies the contract.
Strike
The strike is the price of the underlying asset at which the option will be exercised in the future. What is it for? The fact is that exchange options are strictly standardized, so it is impossible to make a transaction at any price on the day of execution. The exchange initially “splits” the price into parts, for which a transaction with the underlying asset is carried out on the expiration date. For example, an option on a futures contract on the RTS index is divided into parts every 2500 points, i.e. there are options with a strike price of 70,000p., then 72,500p., even further 75,000p. etc. If you bought a put option with a strike price of 75,000p., then on the execution day you get the right to sell futures on the RTS index at a price of 75,000p.
Option premium
Expiration date
The expiration date is the day on which the option contract is exercised or expires. Due to the fact that the exchange standardizes all terms of option contracts, this day is known in advance, i.e. By buying or selling an option, the trader knows in advance when the “X” day will come, or the day when mutual obligations between the buyer and seller will be taken into account.
Volatility
Option volatility is NOT the same as the volatility of a regular linear instrument (such as a stock or futures). Option volatility is another concept that reveals several facets of option trading, namely:
- shows the main measure of market risk;
- is a universal expression of the option premium;
- reflects the speed and magnitude of changes in the price of the underlying asset;
- is a consequence of supply and demand for a given option contract.
What are call and put options?
An option can give the right to either buy the underlying asset or sell it. This is absolutely different instruments, they are not mirrored, and even have different names: a purchase contract is called , a sell contract is called . These topics are fully covered using the appropriate links.
What are the main advantages of options?
So, what are options - these are instruments that give the BUYER some right to make a transaction with the underlying asset on the expiration date at the strike price, and the SELLER is obligated to exercise this right if the buyer decides to exercise the option (for this obligation the buyer at the time buying an option pays the seller an option premium). This means that the buyer’s risk is always limited by the amount of the premium paid, and the possible income can be very large. The seller has the opposite situation; his income is limited by the amount of the premium received, and the possible loss can be infinitely large.
It turns out that the main advantage of options (from the buyer’s point of view) is that there is a risk of fixing a loss at a certain price level, but there are no stop orders in their classic form. Why is it important? When a trader places a classic one, he may find himself in a situation in which the stops can be “blown away” (in in this case the price is deliberately moved to the place where stop orders accumulate, knocking people out of positions). And after the stops are “broken”, the price returns to previous levels, but the trader is already left without a position and it is psychologically very difficult to open a deal again, because, firstly, the person is already frightened by the unpredictable behavior of the price, and secondly , the price has moved away from the levels at which the position was originally opened. The option a priori excludes the possibility of “knocking out” in stops.
The second significant advantage for the buyer is that when the market reaches a level at which the purchased option generates a loss, the trader is not required to record this same loss (if the expiration date has not yet arrived). By the expiration date, the price may return to the “profit zone,” resulting in the option expiring in the black. Those. no matter how much the price falls, until the option expires, no one and nothing can forcefully close this option. Thus, the option buyer is completely protected, i.e. he can either lose the option premium or earn - he has no other options.
What are seller options? What benefits does the person who sells this contract get? Read the separate article, everything is described in detail there.
Options Strategies
By and large, you can perform three types of operations with options:
- Speculative– these include all kinds of strategies aimed at extracting speculative profit (, etc.);
- Arbitration– these are transactions built on the basis of a synthetic formula, which opens up the possibility of making a profit from price imbalances on derivatives market instruments. Read more about here;
- Hedge– operations whose purpose is insurance price risks. Read more about here.
What are options?
Summarize. So, real stock options are traded on the Moscow Exchange in the FORTS section (futures and options RTS). - this is a razvodilovo, which has nothing in common (except for the name) with stock options Dont Have. An options contract has a certain set of parameters, each of which gives a clearer picture of the question of what options are. These instruments provide a lot of options for the buyer, while the seller has obligations in relation to the buyer's right.
Why are these tools so interesting? It’s simple, they make it possible to make absolutely any assumptions about the market... You don’t know how the market will behave, but you are sure that it will not go beyond certain limits - you can make money on this! You don’t know in which direction the movement will be, but you are definitely sure of its appearance - you can also make money on this, etc. I will say more, options allow you to construct positions in which a trader can make money not only during growth or decline, but also during a sideways market, i.e. in any market condition. That's why, what is an option s is, in fact, the pinnacle of trading.
An option is both a contract and a security. The securities market implies the existence of a buyer-seller relationship between two parties. In addition, the classification of the document also distinguishes the concept of buyer and seller, but in this case such treatment applies only to one party to the contract - the holder of the security. It turns out that both the seller's option and the buyer's option are two types of one document.
What is a call option?
As the name implies, the holder of a security at the time of its acquisition becomes a potential buyer of the underlying asset. The option specifies at what price the asset can be purchased and until when. The main idea of such an agreement is that the fixed price (srike) remains unchanged regardless of the market situation.
The seller of the option, in turn, undertakes to sell the underlying asset or reimburse the amount of income that the security holder would have received from the sale of the asset.
The concepts of “buyer of an option” and “buyer’s option” are very often confused. Despite the fact that these phrases differ from each other only in word order, they mean completely different concepts. The option buyer is the person who pays the option premium for the right to own it. A call option is a type of security that gives its owner the right to purchase an underlying asset at a specified price. It is most often called a call option.
Traders use such documents to profit from fluctuations in the value of an asset. Essentially, a call is the same investment in gold, currency, securities, oil or gas, only with minimal risk and without the need to spend a large amount of money at once. The trader just needs to study the market and predict the next price increase.
Example of using a call option
Let's take shares as the underlying asset. large company. Their cost is this moment is 500 rubles per piece. The company plans to soon enter into a long-term contract with a very influential customer. This step will significantly strengthen the position in the market, and accordingly the shares will increase in price.
Having learned about this, the trader decides to purchase shares and subsequently sell them at a higher price, receiving a decent income from such a transaction. Since the increase may be minimal, just a couple of percent, to make a real profit he needs to buy a large number of shares, at least 500 pieces, but this is fraught with serious risks and the need to have 250 thousand rubles in free access. The trader decides to purchase a call option to purchase 500 shares of this company at the current price (500 rubles). The option premium is 8% of the cost, that is, 500 rubles * 500 pieces * 8% = 20 thousand rubles. The contract period is 3 weeks.
If stock prices have risen by the end of the exercise period, the buyer has the right to demand the underlying asset at the agreed price and then sell it at the market price. If prices rise long before the expiration date of the security, the trader has the right to carry out early expiration.
Let's assume that the shares have increased by 15%, that is, now they cost not 500, but 575 rubles. The trader exercises his right to buy shares for 500 rubles and spends 250 thousand on them. These shares can be sold for 287 thousand (575 rubles * 500 pieces). The trader’s profit will be 287 thousand (current value of the asset) - 250 thousand (strike price of shares) - 20 thousand (option premium) = 17 thousand.
If the trader had not purchased the option, he would have received 20 thousand rubles more, but the risk of loss larger amount would have grown several times. With an option, even if the outcome of the transaction was unfavorable, the trader would have lost only 20 thousand rubles, which he spent on purchasing the option.
What is a put option?
In this type of security, all the rules of the game change. The option holder becomes a potential seller. He reserves the right to sell the agreed asset at a fixed price. During the option period market price the asset may fall significantly, but regardless of this, the person who exercised the option is obliged to purchase the asset at the price specified in the contract. 
A seller option is the same as a put option. On financial market it mainly plays the role of a guarantor of the return of funds invested in other investments. For example, a trader purchases shares of a company, hoping for a sharp rise in price in the future. Still, he is not entirely sure of the correctness of his forecast, and in an unfavorable situation, he hopes to at least return the amount he spent on the purchase of these shares. For insurance, he purchases a put option, with its help he will be able to sell the shares at the same price at which he purchased them.
However, put options are most often used at the government level. Such an agreement is concluded different countries or the state and part of its industry, mainly agricultural.
Agricultural production is distinguished by the fact that the invested funds pay off only after a few months, or even years. During this time, average prices may fall and selling the asset becomes unprofitable. Agriculture remains at a great loss, and sometimes the harvest is completely lost.
For reinsurance, farms enter into an option agreement with regular customers, paying them a one-time premium.
Put options are often confused with futures. The difference between a futures agreement and an option is that the holder of the document is obliged to sell the asset within a given period. There is no premium in such an agreement. Both parties to the contract are equal: by signing the contract, they potentially give up the profit that they could receive if the price of the asset changes in their favor.
Example of using a put option
Let's take the same example as in the case of a call option, only this time the trader has already purchased 500 shares of the company at a price of 500 rubles. He spent 250 thousand rubles on this and hopes to make a profit in the future from resale of shares at a lower price. It soon becomes known that the company is on the verge of losing several important contracts. If these contracts actually fall through, the stock price will plummet. The trader finds himself in a rather difficult situation. Not only will he not make a profit, but he may also lose some of the invested funds. In order for possible losses to be minimal, he needs to sell the shares at least at the purchase price. To do this, he enters into an option agreement, for a fee of 20 thousand rubles (8% of the value of the shares), he receives the right to sell the asset at 500 rubles per unit.
Before the option expires, the shares actually fall in price, quite significantly - by 25%. Now they cost 375 rubles. An investor can use the option and sell them for 500 rubles, losing only 20 thousand rubles (option price).
If he had not entered into this agreement, the losses would have been equal to 250 thousand (cost of acquisition of shares) - 187.5 thousand rubles (cost of sale of shares, 500 pieces * 375 rubles) = 62.5 thousand rubles.
Buying a put option is unprofitable if its price is higher than the possible depreciation of the asset. For example, 8% of the value of the asset was paid for the option, but it fell in price by only 5%. Thus, the buyer loses more money from purchasing the security than from selling the asset at a lower price.
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Buy option- a stock market instrument that, together with futures contracts, belongs to the category of derivatives. The name is due to the fact that the value of these assets is calculated as a derivative of the price of the underlying instruments (securities).
Buy option: types, place in classification
Speculators (exchange players) acted as developers of option contracts. Their task was to create an instrument that would guarantee the purchase (sale) of a certain product at a fixed (agreed) price, and also provide income when the value of the instrument changes in the desired direction.
Each option is often based on different financial assets. In particular, these include currency, interest rates, stock market indices, stocks, and so on. The most popular options are those with stocks as the underlying instrument.
All options are divided into two categories:
- call options ( English name- Call option)- instruments that provide the right to purchase an asset in a certain volume(quantity), on time and at the cost agreed upon by the parties. In this case, the party acting as the seller of the contract undertakes to implement the terms of the contract (that is, sell the goods) if the buyer requests it. the transfer of an asset can occur both on the expiration date (the date specified in the agreement) and before execution.
A market participant who buys a call option expects the underlying asset (index, stock, currency, etc.) to rise in the future. As a consequence, a call option can only be executed when the price specified in the agreement is lower than the value of the asset established on the market;
- put options (English name - Put option)- the second (opposite to the first) instrument. allows the buyer to sell. Wherein we're talking about only about a right, not an obligation. The time when the transaction can be completed and the value of the asset are specified in the agreement of the parties. As in the previous case, only the seller has an obligation. The latter must fulfill the contract if there is a desire on the part of the buyer. The transaction can be executed directly on the expiration day or before it.
When executing a trade, the holder of a put option hopes that the price of the underlying asset will decrease. As a result, the Put option will only be executed if the value specified in the contract is higher real price market.
Of the described instruments, call options are more popular. They can be of two types (according to design features):
- American – style option- American type contract. Its peculiarity is the freedom of maturity of the instrument. That is, the option can be exercised or redeemed before the date specified in the agreement, that is, almost at any time;
- European – style option- European type contract. Unlike the “American” version, in this type of instrument execution is possible only on the appointed date.
All call options can be divided according to the type of underlying asset. There are several options here:
- call option on currency. Here the main asset is currency unit. The most popular are euro, US (dollar), pound sterling and so on;
- call option on stock assets, namely for shares of certain companies. If you wish, you can work with a complex option - a call contract on the index;
- call option on goods. Such an instrument is a chance for a market participant to become a holder of a certain commodity - gold, oil, silver, and so on.
For American option The final date on which the contract must be exercised and the expiration date for a European option is the Friday preceding the 3rd Saturday of the month. For example, in the United States, with an option in hand, he can instruct his broker to present the contract for execution by 16.30 pm. The broker, in turn, has a time reserve until 10.59 the next day.
Buy option: characteristics, features
Due to its wide possibilities, ease of use and prospects for good earnings, the call option has become widespread among investors. There are always two parties involved in a transaction - the holder (buyer) of the option, as well as the seller of the instrument. The parties to the transaction have great differences in terms of exercising their rights. Thus, the seller of a call option must sell if the buyer requests it. The second party to the transaction (the buyer) only has the right to buy the asset (not the liability).
Due to the high risk of changes in the value of the underlying option asset, the seller takes a lot of risk. To compensate for the risks and interest the seller in completing the transaction, the buyer provides him with a bonus - a certain amount, which will remain on hand in case of refusal of the receiving party.
When making a call option transaction, there are several points to consider:
The execution cost (strike price) is the amount that the buying party transfers when purchasing the underlying asset;
Put option(English Put option) - an option contract giving the owner the right, but not obliging him, to sell the underlying security at a certain price during a certain period of time. A put option is the opposite of a call option, which gives the holder the right to buy securities.
Learn more about put options
A put option becomes more valuable when the price of the underlying stock declines relative to the option's strike price. Conversely, a put option loses value as the option's expiration date approaches, especially as the price of the underlying stock rises.
Destruction by time
“Time Decay” is a gradual decrease in the value of an option over time.
The value of an option decreases as the option expiration date approaches because the likelihood that the stock price will fall below the strike price decreases. When an option loses its time value, its intrinsic value remains, where intrinsic value is the difference between the market value of the security when the option was written and the exercise price of the option. An option with a “positive” intrinsic value is called an option whose strike price is more favorable to the buyer than the current price (in-the-money), an option with zero “intrinsic” value is called an option whose current price is approximately equal to the strike price (at-the- money), an option whose “intrinsic” value is less than zero is called an option whose exercise price is lower than the current value of the corresponding instrument (out-of-money).
Example of a long put option
Let's assume that an investor owns one call option on shares of a notional company, TAZR, with an exercise price of $25, expiring within one month. Therefore, the investor has the right to sell 100 shares of TAZR at a price of $25 before the option expires (typically the third Friday of the month). If TAZR shares fall to $15 and the investor exercises the option, he will be able to purchase 100 shares of TAZR for $15 on the market and sell them to the option writer for $25 per share. Therefore, the investor will receive $1000 (100 x ($25-$15)) from the option. note that maximum size potential profit in in this example does not take into account the premium paid to purchase the option.
Example of a short put option
Let's say an investor is bullish on the stock of a fictitious company, FAB, currently trading at $42.50, and doesn't believe its price will fall below $35 within the next two weeks. An investor could profit by writing a put option on FAB with a price of $35 for $1.50 (so the investor could receive a total of $150, or $1.50 * 100). If FAB closes above $35, then the investor will make his profit since the option exercise price will be lower than the current price of FAB shares. Conversely, if the share price falls below $35, the investor will be required to purchase 100 shares of FAB for $35, for his obligation.
Equity option - an option that gives the holder the right to sell or buy a specific number of shares for a certain time period at a predetermined price.
Stock options are a popular instrument in the stock market, unlike other option contracts.
Basic Concepts
An options contract is a form of transaction where one party transfers to the other the right to purchase a financial instrument at a fixed price and for a certain period of time.The option seller is the party transferring the option contract. The buyer of the option is the party who agrees to pay the seller for his right to purchase.
Exercising an option is the moment at which the holder of an option contract exercises his right to purchase shares.
The subject of the option (underlying asset) is the shares that can become the object of the option contract.
The strike price (exercise price, striking price) is the cost of an option transaction.
The maturity date of an option contract is the time specified in the contract. It is the last day when a transaction under this contract is possible.
Types of Stock Options
By and large, all option contracts fall into two categories:- American type (the transaction can occur at any time or at a certain moment, which is agreed upon by the parties to the transaction in advance);
- European type (the contract is implemented only on the appointed date of completion of the option).
- Call (to buy) - the holder of the contract, by right written in the contract, buys a certain number of shares at a fixed price or refuses the transaction;
- Put (for sale) - the contract holder sells securities or refuses the transaction, in accordance with the right specified in the contract.
- Long - long and short;
- Shot - long and short.
Figure 1 - Main options positions
Practical aspects of working with stock options
As stated above, there are two types of stock options: call and call. In practice, purchase transactions (Call) are more often concluded.A call option is more often used because the investor (buyer) can purchase the underlying asset from the holder (seller) at the strike price and within a specified period. If the conditions do not allow the transaction to be completed or the parties are not satisfied with them, then the obligations under the option contract may not be fulfilled.
When signing an option contract, the parties are in different conditions, that is, the seller takes risks, and the buyer hedges the risks. The danger for the seller lies in the possibility of an increase in the value of the assets, which is why he will have to buy them back at an increased price in order to fulfill the obligation under the option contract. The seller's risk can be reduced if the buyer offers a premium (a specific amount) as the option price.
When purchasing a stock option, the premium consists of two components:
- internal price (price difference between base and strike);
- external price (the difference between the option price and the internal stock price).
