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An option is a contract giving the buyer the right to buy or sell the underlying asset, such as stock or commodity at a specified price before a certain date. The buyer has the right to demand the execution of the option and the seller is obliged to meet the requirement.
The option price is a premium to the seller. Simply put, for a fee or premium, one party undertakes to fulfill the bargain at the announced price, the other side of this award receives a right to choose, or to take advantage of this obligation, or to abandon it.
It all depends on the market value of the underlying asset at the time of contract execution. The subject of an option contract may be shares, currencies, stocks, treasury bills, government bonds and futures contracts.
Options are of two types - the US, those that can be executed before the announced date, and Europe, which are performed in a strictly announced date. The contracts that give the right to buy the underlying asset at a specified price in the future called «coll» options, if the contract gives the right to sell, it is «put» option. The price at which the buyer and seller agree to, called a premium, and includes two basic elements, the intrinsic value and time value. Time value diminishes over time, the date of execution, it is equal to zero and the premium accordingly takes into account only the intrinsic value. Execution of option contracts may either by physical delivery of the underlying asset, either through payment in cash.
In transactions with options, the main risk are sellers or subscribers options, since their income is always limited by the size of the premium and the possible losses in case of unfavorable price movement of the underlying asset is not limited by anything. option holder can simply waive its right and thus lose the prize. Such an asymmetrical distribution of risks and unusual structure, making use of options is extremely complex and requires precise calculations and forecasts. It is true as a subscriber, and the option holder may close any open positions until the expiration of the contract, by entering into a so-called offset deals, resulting in profit or loss, determined by the difference value of the option at the opening and closing positions.
The first in the history of option transactions were perfect in the early 30-ies of the seventeenth century. The basis of these transactions with real goods trade lay tulip bulbs in Holland, as well as the shares of the East India Company, it was the first financial assets, which have become the underlying asset of stock options.
Resale appeared only during the American Civil War, in the mid-nineteenth century with the emergence of the first exchange.
Today, options are a major part of the financial system. Volumes in these instruments are soaring. The secret of their popularity is that they can be used effectively in the market as a speculative and hedging positions.
On the market today there are exchange-traded and OTC options. Stock options are exchange contracts and their treatment is similar to futures, options for such exchange shall be established by the contract specifications. At the conclusion of transactions, trading participants stipulate only the value of the option premium, all other options are standard and are set by the exchange. Published by the stock exchange quotation of the option is the average value for this option is the day award, with options with different strike prices or performance dates are considered to be different contracts. In stock options, the clearing house keeps records of participants' positions on each option contract. That is, the bidder can buy one contract and if he sells the same contract, his position is closed. Exchange Clearing House is the opposite side of the transaction for each side of the option contract. The main advantage of options is that they allow you to limit risk and generate additional income. option contracts hedging strategy can be formed by combining different options embodiment that allows to determine the value of wins and losses. In addition, with the use of options, you can create a synthetic position, it significantly reduces the transaction costs, because the shoulder effect is stronger than that of other segments of the securities market.
Today, the volume of world trade in derivatives reached US $ two trillion. The paradox lies in the fact that the volume of the derivatives exceeds the amount of the underlying asset. For example, in the oil market, the volume of futures and spot market refers three to one, at the same time, the sharp volume growth and the globalization of markets, financial derivatives are certain risks to the global economy.
To achieve sustainable success in their work, the investor must be careful when calculating the risk of positions held and constantly work on their own trading tactics.
Working with options
The options in recent years, are gaining popularity among professional players and private investors. This is a kind of derivative financial instruments. Options - a contract concluded between the two investors, one of them sells an option, and the other buys it and gets the most right during a specified period, either to buy or sell at a fixed price a certain amount of the underlying asset. Here, the first party is not obliged to make a deal.
In addition to traditional strategies, options are commonly used for insurance players in their positions on the market and the implementation of arbitration, ie. E. Game on price imbalances.
Usually there are two types of option, purchase options or «coll» options that give the right to buy the underlying asset and selling options, or «put» options. Buyer «coll» option has the right to request to the agreed date of sale of a certain number of shares or other asset at a price that was due at the time of conclusion of the contract. A buyer «put» option on the contrary, has the right to sell an asset at a given price at a given time.
In any case, it turns out that the seller is infinitely great risk, because the price can be infinitely increase and decrease dramatically. The buyer in this case has the opportunity to win much, and it is equal to the risk that the amount of money that is paid by the seller of the option. Prices for options depend on many factors, and their analysis is the essence of the activities of the portfolio manager. Today underlying assets for options may be exchange-traded stocks and stock indexes, foreign exchange, treasury bills, government bonds and even futures contracts.
Also in the market there are different types of options. European options - different predetermined due date. American options - may be brought to the execution at any time for a fixed contract at the expiration date, however, the costs of closing deals is often lower than the costs associated with the execution options.
The question of execution of the option contract is as important for the investor. There are two types of options - with the physical delivery of the underlying asset and with the calculation of cash. Units option trading with physical delivery, the amount of the asset that is the object of purchase or sale, after the execution of the option contract. Settlement option gives its holder the right to receive a cash payment based on the difference between the value of the underlying asset at the time of exercise, or the calculated strike price and the option exercise price. The exercise price for the settlement of the option, this is the basis for determining the amount that the holder of the option has the right to the execution of the option, if this event occurs.
Under options understands special kind of stock exchange transactions with a limited, compared with the usual operations of futures risk. The options are conditional forward transactions…