Derivatives (Part 2/ classic derivatives)
For the other parts or the whole Derivatives Guide please read the attached post on my profile.
3) Options
When you buy an option, you buy the right to buy or sell the underlying asset at a certain time. For this possibility (not the realization), you pay this option seller an option premium. [Since this time is in the future, one speaks with option business also of futures].
Thinking logically, we now arrive at the following: if I assume that share X will soon rise, I want to buy the share at a lower price in the future; I therefore buy the corresponding option from the option seller. A call option.
If you again expect a falling underlying, you want to SELL the stock in the future more expensive, the associated option is called a put option.
Options are only traded on futures traded.
They also have no WKN, a special options broker is needed.
Fictitious simplified example:
You run a company that has a certain monthly demand for oil. The oil price is currently at 100€, but because of the macroeconomic situation you assume that it could increase very much in the future.
So you buy a call option to have the right to buy oil for 100€ in the future. The option trader must sell you with it also with rising oil prices for 100€. If the prices fall, you can let the option expire and buy at lower prices. You have to pay the option premium in both cases. [This is an option transaction, since trading at the option price is not obligatory].
Price of the option:
While holding the option to buy or sell the underlying asset at the end of the term in the amount of the strike price [The strike price/strike indicates the value at which the option can be bought or sold], its value changes.
The term of the option plays an important role here, as the price depends on the following things: strike price, term (time value), price of the underlying product, interest rate and the option premium (which in turn depends on time and intrinsic value value...) [reference quantity * (price underlying- underlying)]
The important factor for the premium time value means in simplified form: As the term of the option progresses, the probability of the development expected from the point of view of the option buyer increases.
[Option premium: Black- Scholes- model, is composed of intrinsic value and time value].
In option pricing models, the variables relevant to pricing are abbreviated with Greek letters and so are "Greeks"(Delta, Theta, Vega and Rho) (see "Valuation warrant").
Furthermore, there are additional differences in the exercise type of the options:
- American options can be executed on any trading day before their maturity date
- European options are executed only on the maturity date
- Bermuda options can be exercised at various specified times
4) Warrants
Unlike options, warrants can be composed at will by issuers. They are issued by banks and securities houses, with their own WKN, but can also be traded on common stock exchanges. *8
In the case of warrants, there is also the issuer risk. This means that in the event of the issuer's insolvency, the warrant is also worthless.
*8 They can be traded OTC
Implementation:
As with options, investors can trade warrants on call and put warrants put warrants.
The chances of winning with classic call warrants are theoretically unlimited. With put warrants, on the other hand, there is a "natural" profit limit, because the price of an underlying asset can never fall below zero..
The maximum risk of loss for both types of warrants is always limited to the capital invested.
Each classic warrant has the following 3 crucial components:
The strike pricethe subscription ratio and the term.
Valuation (based on "price of the option"):
The strike price
At the strike price, the buyer of the warrant can buy or sell the underlying asset.
The higher the price of the underlying, the higher the price of a call warrant. The opposite is true for a put warrant.
Subscription ratio
The subscription ratio of options, also known as "contract size", "option ratio" or "contract size", provides information on how many shares of the underlying asset an option contract relates to. For example, a stock option refers to 100 shares.
Delta
Delta indicates by how much the price of an option changes if the underlying asset changes in price by one unit. Call options can have a delta between 0 and 1, put options have a delta between 0 and -1. (Logically, since here the price develops in the opposite direction to the underlying value).
https://www.ideas-magazin.de/informationen/wissen/was-ist-eigentlich-das-delta/
But: The delta is a snapshot, this relativizes the significance regarding the selection of a warrant. More important here:
Omega
The omega indicates by how many percent the price of the warrant theoretically changes if the price of the underlying asset rises or falls by 1 percent. The ratio is a combination of the leverage and the delta and is also referred to as the theoretical leverage.
The simple leverage is calculated from the price of the underlying * subscription ratio / the warrant price. If you multiply the result by the respective delta, you can get a feeling for the price development of the warrant with the help of the omega.
However, this value also changes logically as soon as the simple leverage or the delta change.
https://www.ideas-magazin.de/informationen/wissen/was-ist-eigentlich-das-omega/
Gamma
Delta changes depending on how other market parameters change. Especially the base price influences the delta extremely when it changes, the strength of this change is described as gamma.
In principle, it can be summarized: The steeper the slope of the delta [= the more delta at the money is], the greater is the gamma. Since delta tends to get steeper and steeper as the remaining term of the warrant gets shorter and shorter, gamma also gets higher and higher here.
! Gamma thus describes the actual "leverage" that a warrant can build up !
[a gamma definition from a mathematical, issuer's point of view and altogether more accurate: https://www.ideas-magazin.de/informationen/wissen/was-ist-eigentlich-das-gamma/]
Vega
Another influencing factor is volatility. However, it is not so much the historical vola (standard deviation of past changes in the strike price), but rather the expected range of fluctuation; implied volatility.
The influence of (implied) volatility on the option price is measured with the key figure Vega. Vega indicates by how many euros the value of a warrant changes (adjusted for the subscription ratio) if implied volatility rises or falls by 1 percentage point.
The bottom line is: the higher the vola, the higher the price.
Analogous to delta and gamma, vega is also a dynamic variable and represents a snapshot.
However, with far out of the money warrants (small delta), even a small vega has an enormous impact. The low volatility is higher in relation to the already low warrant value.
https://www.ideas-magazin.de/informationen/wissen/was-ist-eigentlich-das-vega/
[
Theta ,,Time is money"
Defines the time value loss of a warrant. Since I am betting on rising prices for a call warrant, it loses value constantly, all other parameters remaining the same.
As a result, at-the-money warrants (strike price = exercise price of the option) have a high theta value, while out-of-the-money warrants have hardly any time loss.
[ https://www.ideas-magazin.de/informationen/wissen/was-ist-eigentlich-das-theta/ ]
Rho
Influence of the interest rate change of 100 points on the option price.
No chance of a short explanation. Fortunately, in practice, the Rho has the least importance of all the Greeks. For one thing, in the futures market, mostly at and out of the money
quoted options traded, that is, those with lower Rho,
thus the interest rate influence is not as pronounced.
On the other hand, the Rho influence can be controlled by the Vega, because the Rho is positively correlated with the volatility ratio Vega.
[ However, it must not be completely disregarded when using warrants purchased during key interest rate increases by central banks....
https://www.ideas-magazin.de/informationen/wissen/was-ist-eigentlich-das-rho/ ]
]
"It's way too complicated!"
Right.
That's why, among other things, neobrokers (where a majority of clients are trading for the first time) have much simpler derivatives.
With those, you can verl.... your money in a much simpler way. return on investment.
