Investing for Beginners .EU, investing

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J. Paul Getty

Investment in Options

 

Options are very known derivatives and especially popular among investing speculators. Options has some attraction: every successful prediction can grow up invested amount a lot of times very quickly and potential losses are limited – can be lost only that amount that was spent to purchase an option, while the losses from investing in futures or forwards can be unlimited.

Valuing options from the buyer and the seller's side, they look completely different. Option buyers (long position) have the option: if you want you can make a transaction at pre-agreed conditions, and if conditions will be unfavorable - the transaction can be abandoned. In the meantime, the option seller (short position) must fulfill its obligations, if requested by the purchaser. Option sellers usually are financial institutions.

Options can be either traded on stock exchanges, either can be non-listed. The options may look very attractive from the buyer's side (long position), but in fact the buyer always pays the risk premium, and as a hedging instrument option shall be very expensive tool. There can be different types and modifications of options. In general, the value of the option depends on these criteria: exercise (strike) price, object market price, contract duration, interest rates, riskiness of the object (volatility) and option type. Options usually are sold in 100 units.

 

Investment in Call Options

Call option gives the right for the buyer (long position) to purchase the item at predetermined price and date. Long call option value increases when the price of the object increases on the investment market.

 

Investment in Put Options

Put option gives the right for the buyer (long position) to sell the item at predetermined price and date. Long put value option increases when the price of the object decreases on the investment market.


It may be American option, when option can be exercised at any time during option duration, or European, when option can be exercised only at the end of the contract. In practice, options are usually not implemented – investor just gets paid the difference if there is any profit from investment.

 

Can be different options investing strategies (combining put and call options). Other investment strategies may also include some options for risk management. Options can be made for any kind of financial assets but the most popular are stock options and index options.



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