How do the options work?

Have you heard about stock exchange options? If it’s no, it’s not surprising because the media and financial sites are very focused on the equity market. In this sense, it is more familiar for individuals who want to put a foot on the stock exchange. Still, investing with options can help you build, manage, and protect your stock portfolio. What’s great is that you can earn income on a regular basis if you have significant capital.

Before taking action, it would be wise to know the basics of this market. Why am I talking to you about it today?

Read also : What is a mutual broker?

To be honest with you, I did an options training with Gaël Deballe of Zen Option to generate revenue. It met my expectations except that it needed capital Therefore starting to apply it regularly. I set myself a starting capital at €10,000 at my broker Binck.fr (now Saxo Bank) with the challenge of juggling my Global and High Yield portfolios.

This is part of my evolution as a long-term investor. If I can get rich a little faster, why not enjoy it intelligently. The real reason that forced me to go along this path is that options are a great way to potentially invest in stocks in a clever way .

See also : When does the New York Stock Exchange open?

What’s an option?

There are two ways to see the option.

If you are in the buyers’ camp, one option is a contract that gives you the right to buy or sell an underlying (share, index, currency pair, bond, ETF, raw material…) at a pre-defined price and maturity date. The option buyer pays a premium to the seller to acquire this right.

If you are in the Seller’s Camp, an option is a contract that allows you to receive a bonus but commits you to redeem or resell the underlying at the price set in advance in case of assignment on the due date.

Base #1: You will often hear about the notion of Call and Put

The Call/Put concept is somehow equivalent to Long/Short. But I admit that financial vocabulary is sometimes confusing if you are in a run-in investment.

Call is the rise. The Put, that is the decline. So far everything is fine. You will see as investing on options is not limited to call buy/sell or put buy/sell.

Now, corsons a little bit of things.

Base #2: The settings of a Call and Put option

When you are going to invest on options, it is important to know the settings of an option.

You’ll find the underlying ticker.

Take the Coca Cola share for example: KO P 21 Sep 2018 $42.00

  • KO is the mnemonic code or abbreviated identifier of the Coca-Cola action.
  • The letter C for Call or P for Put.
  • The due date that corresponds to the 3rd Friday of the month.
  • Exercise price or strike

Then, You will find the Bid/Ask or Offer/Request. The Bid will interest the option seller more. Ask the option buyer.

The volume. Theopen interest that corresponds to thenumber of open positions in progress . The higher it is better. Why? Because the option has better liquidity.

Finally, the implicit volatility which I will explain a little later. It has a significant influence on the premium of an option.

Base #3: The premium of an option

Be attentive because premium is the hard core to invest with options .

To buy or sell an option, you will pay or receive a premium respectively. Inside this premium, you have an intrinsic value and a time.

Option Premium = Intrinsic Value (Vi) Time Value (Vt)

The intrinsic value is the difference between the price of an asset and the strike. At least, it is equal to 0 whether it is a call or put option.

  • On a call, Vi > 0 if the asset price is higher than the strike.
  • On a put, Vi > 0 if the asset price is less than the strike.

The time value is the difference between the option premium and the intrinsic value.

It is dependent on the position of the strike relative to the asset price. The closer the strike is to the asset price, the greater the premium. It will be more so if the option is in the currency.

It is dependent on volatility implicit. It is an indicator that measures future changes in assets based on historical volatility and possible future scenarios in financial markets.

It is dependent on the time remaining until maturity. The closer the option comes to its due date, the faster the time value decreases as you noticed on this chart.

Source mataf

Practical case with Coca-Cola action

To get acquainted with the options, you need to do a little gymnastics with the notions of out of money, currency and in currency. Always with the example of Coca-Cola.

On April 13, 2018, Coca-Cola is quoted at $44.51.

The position of the strike in relation to The action will let you know if the option is out of currency, currency and currency.

Let’s stay simple to invest with options

As you can see, I made sure not to confuse you with the technical terms. The purpose of this first tutorial is to make you know basically the universe of options. True, these are derivatives but the rules of the game known in advance.

I took a long time to understand their usefulness. By confidence, investing with options can bypass certain obstacles legally. We will see in the next tutorials that you have more cards in hand.

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