Equity Options

Welcome to the wonderful world of stock options. You may have heard that option trading at high risk, and it is actually for the same reasons that the spread of paris is at high risk. Derivatives are themselves on the cash markets, and are very suitable, but the options themselves were brought into the U.S. market in the mid-1970s as a hedging tool. In other words, they were a form of insurance. You paid a premium, much like car insurance, which protects you in case of accident. In financial markets you've bought some protection if the market went in the opposite direction. In this paper, we examine the stock options, which are those from the market share in cash or shares.

In the early years, the options market was very low, with only a handful available on most blue chip stocks in the Dow Jones 30 and other major indices. Today, the U.S. market is huge, with more than 12,000 stock options available to the trade. In the United Kingdom it is a little less than 100 (mainly blue-chip shares) which can be rather limiting, but if your business is primarily in equities of the United Kingdom, it is not a bad place to start.

OK, I'll start with some definitions, and I'll try to keep it as simple as possible (not because you will not understand) but because the terminology can be very confusing for newcomers. It took me 6-9 months to get comfortable with this way do not expect to pick it up immediately. First, there are two types of options as follows:

A call option - A contract representing the right for a specified period to buy a stock at a specified price determined

A put option - A contract representing the right for a specified time to sell a security at a stated price determined

An option is a contract that gives the buyer the right but not the obligation to buy or sell an underlying asset at a specified price on or before a certain date. Right, let me try to explain. Suppose you buy a classic car second hand. You visit the owner, love the car, and agree on a price, but explain that you will not have the money for 4 weeks. The owner agrees to keep the car and the price for you for only 4 weeks, but only if you pay a small non - refundable premium for his trouble (which is in excess of the total price of the car)

It is an option contract - the car owner did write an option contract to give you, the contract holder the right to purchase the car within four weeks, the price agreed . However, as the option buyer (or holder), you have an option to purchase, but you do not if you change your mind. Therefore, in the above definition it says "the right but not the obligation - if you change your mind you just walk away. All you have lost your bonus is that the buyer keeps (even if you decide to go ahead). The car owner, who wrote the contract, has a contractual obligation to deliver the car at the agreed price, and he or she must deliver.

In summary, a buyer of options you have the choice - you can perform the contract or on foot. As an option seller, you do not have the choice - if the contract is exercised, you must deliver the asset. If we take the example a step further (I know this is not ideal, but I hope it gives some idea of what these things are all about). Suppose, if you're waiting for the bank to provide cash, so you can go ahead and buy the car, the original factory where the cars were made was destroyed by fire . Suddenly, the cars rise in value quickly. You, however, have a written contract at an agreed price, provided that you buy in the next four weeks. Now, you as the buyer or the contractor have two choices. Firstly, you can exercise your contract by paying the seller the agreed price and immediately put the car on the market and salt.