Under a special kind of understanding of the ways forward exchange contracts with a limited, compared to the usual operations of futures risk. The options are conditional contracts, providing one of the parties the right to perform before, or not perform a contract entered into as hard transactions (forwards and futures), which are legally binding, however. In recent years stock options gradually increasing in popularity as more complex, but at the same time offers much more possibilities, as compared to futures, financial instruments.
Option means an urgent transaction by which one party gains the right to accept or transfer of an asset at a fixed price within a certain period, and the other party agrees to the request of the counterparty for the cash prize to the implementation of this law by the To make it compulsory to send or receive an object of the transaction to ensure a fixed price. Thus, the feature option, the transaction of sale, where it is an object that the buyer does not have title ownership and the right to acquire it acquires.
Obligations of the buyer an option limited to timely payment of the option premium option seller. In return, the seller must
In this segment of the futures market is fierce competition prevails.
Provide a well-defined guarantees of their liabilities in the form of mortgage money (margin) or securities. The difference in the types of obligations by the buyer and seller of an option reflects the assumed separation of the potential risks, profits and losses between the partners. For the buyer the opportunity to potential losses on the size of the premium paid, ie, limited risk in buying options are limited, and the profit potential is unlimited. The writer is always at risk of unlimited losses, and its maximum profit is limited to the size of awards.
Opportunities are available in two forms: Contracts for the purchase and sale contracts.
To purchase options (stock options “Call”), under the conditions of which the holder of the option has the right to acquire the asset at a specified price (the price-strike) a person who placed the order, . In return, the option seller is obligated, the asset if the option holder to sell so requests.
Two. To sell options (options “Put”), under the conditions of which the holder has the option to sell the right to use an asset at a specified price a person who has taken an option. In return, the writer must buy the asset if the option holder makes a contract for a settlement.
Write an option, the seller in this transaction opens a short position, and the buyer – a long position. Accordingly, the notion of a short “call” or does “put” option to sell the “call” or “put” and long “call” or “put” – they buy.
Option price – the premium, ie paid amount for the purchase of the option. It consists of two components – intrinsic value and time value. Intrinsic value – the difference between the current price of the underlying asset (spot price) and the option exercise price (the price-strike). Value – the difference between the amount of the premium and intrinsic value. If before the expiration of the contract is a lot of time, the time can be significant cost-value.Reduced by close to this time and the expiration date of the contract will be equal to zero.
The premium for options vary depending on market conditions.They depend on various factors, the most important of which is the time to completion (end expiration) and the fickleness of the market. The theoretical value of the option based on different pricing models can be calculated, and are based on a variety of known factors, such as: historical (statistical) volatility, time until the end of the process, the cash price, interest rates, etc. , but the market price may be quite different, because it takes into account the expected volatility (expected volatility), and supply and demand.
In the process of forming a trading value of the option, both sides of the transaction is, and calls her chances to make a profit.Options are divided into categories depending on the ratio between the chance of profit and risk:
- Internal (“money”) options have an exercise price below the current market price of the underlying asset for the “call” and above the market price for having “set.” Formally, this means that the buyer can use these options once their right to a net profit after the sale (purchase) will be an asset. The occurrence of such an arbitrage hampered by the fact that the grant of options always override the internal to the variance by an amount depending on supply, demand and expectations of asset price growth. Value Mezhuyev chance of profit and risk is a “great price – low risk” identified;
- External (“outside money”), stock options have an exercise price that is much higher than the spot price of an asset for the “call” and is much lower for “slavery.” The price for external options is very low, since the execution of these options is changing prices on the spot, a significant amount in the right direction, but this event usually has a low probability. This type of option characterizes the statement “low pay and high risk”;
- Market (“the money”, “in the money”) options have an exercise price that is close or equal to the market price of the underlying asset and, accordingly, “medium risk and cost.”
Americans and Europeans: In reference to the time limits options are divided into two types. Only the date of expiry of the contract – An American option can be on any day prior to the expiration of the contract, and the European are exercised.
Just as in the case of futures contracts, there are primary and secondary market options. The primary options markets operate almost continuously: speculators and other investors are options, conditions that are constantly changing assessment of the current market situation and future trends are reflected discharged. In this sense, the functioning of the primary market for options on the movement in the spot market. Holders of options that in turn sell them to a third party, there is a secondary market for options where they are treated like other derivatives, ie, in the OTC market and on stock exchanges.
On the open market option contract is inextricably connected buyers and sellers. The contract may be any other conditions in order to reach a compromise between the buyer and seller. For example, to extend the right way. In the OTC market no restrictions on the type of the underlying asset, other than any amount allowed to an option contract.
Options that are traded on the stock market are called “listed options”. Options trading is structured in order to prevent multiple resale. Conditions of options traded on the stock exchange, are standard, so that they are very liquid (see the Appendix. 2). All other things being equal, the price (premium) for the resale of an option is closer to the end of the period of reduced validity.
Exchange trading of options is being organized by the type of futures. His trademark – the parties are in the same situation with regard to contractual obligations. Therefore, the option buyer pays to the opening position, only the premium. The writer is obligated to pay an initial margin. If you change the current price of the underlying asset, the margin may vary, give a performance guarantee of the seller’s option. In the exercise of the Option Clearing a person chooses the opposite position, and it has to implement measures in accordance with the Treaty. The closing of the option position is achieved by:
- The conditions of an option in the prescribed manner, called the strike;
- By entering into a reverse option – buying when the option was sold, and sales, if the option was purchased.
Option offers a number of ways, not for other products, particularly in structuring and hedging positions. They can be used to increase and reduce risks.