Today I will try to explain options in a way that everyone understands and I will not tell the story. I'm talking about pure options, not warrants, which many people confuse.
What are options?
Options are nothing more than a transaction to sell or buy a contract at a fixed price by a certain date. This does not have to happen, approximately 72% of all options expire completely. This means that you receive a premium for the sale of a call or put, which loses value over time - this is called time value. So if the option is not at the strike (exercise price), you can close the option at a profit. 1 option is always a contract. Side note - option traders like to say that you should look at options like insurance. You receive a premium, save it up and in the event of a loss you buy the share, future or commodity. I will limit myself to stocks and S&P500 futures.
What types of options are there?
There are American options that can always be executed up to the expiration date.
The other type is the European option, which can only be executed on the expiration date.
What does put/call mean?
Put means I have the obligation to sell the shares at the specified strike, regardless of the price. This means that the put buyer can always sell me the shares at the strike price even if the share is a total loss.
The call seller sells the right to buy the shares from the buyer at the fixed price.
I just said that options can expire worthless. Why do you sell or buy the right? On the one hand it serves to minimize losses and on the other hand to limit profits. This is often done by large investors such as Goldman Sachs, JP Morgan etc. and small investors also do it. I would have to digress too far now, but let's just say that selling options brings in money that is risky.
What is a krontakt?
1 contract = 100 shares (EU, USA, Canada, and many more)
= 50 S&P500 futures
= 5000 bushels (wheat, soy, etc.)
These are just a few and I could name more. I have only listed the regulated contracts that can be traded on any futures exchange, there is also OTC (over-the-counter trading) but this is not advisable because of the liquidity.
What is the strike price?
The strike price is nothing other than the fixed price for the sale or purchase. If the price of a put is above the strike price, the option is not executed. In the case of a call, you must then sell the shares if the price exceeds the strike price.
There are Greeks with options. Waaaaasss?
Wanted to throw in a little something unnamed, namely the Greeks. There are indicators that use Greek letters.
- Delta = is for the price movement in the time period. For example, the probability that a -0.001 delta is exercised is so low that you get no premium or too little premium here.
- Theta = indicates how much an option loses in time value per day
- Vega = indicates how the price changes with volatility
- Gamma = basically measures the delta.
You only really need the delta. A low delta basically indicates how likely it is that this option will be executed. The lower the delta, the less likely but also the lower the premium.
Now a few more examples
Put
I sell 1 contract of share A at 50$ until the 3rd Friday of the coming month (approx. 40-day term) at a premium of 0.50.
The price on the expiration date is 55$. Share A is not bought, the option expires completely. 50$ profit.
The price on the expiry date is 45$ I buy the share 100×45$-50$(premium)=-450$ loss
Call
I sell 1 contract of share B at 60$, same maturity and premium
The price is at 63$ share would be sold at 6000$ and I have a premium profit of 50$.
The price is at 58$ Share is not written off and you have a premium of 50$.
I would say this is really the basic information you should have even if you are not an option holder. If there is more interest, just comment. If you have any questions, of course 😅. I would still like to apologize for my poor explanations, according to my wife I can explain better when I'm drunk🤣. Spelling mistakes are due to autocorrect and my poor writing skills. Incidentally, there are also options on Bitcoin etc. However, I don't know my way around maybe I know@oliverplass know more?
I'll make a few more hashtags now and think about what I can explain in the next post.
#koksundnutten
#optionen#rendite
#disziplin
#nopainnogain#derivatives#financial freedom
