Short call option vs short put option
While the risk of a short-call option is unlimited, as the stock price can theoretically rise infinitely. The risk of a short-put option is limited by the agreed exercise price.
Quick overview short/long and put/call options
Option Description Long/Call Buyer thinks underlyings price will rise. He has the right (but not the duty) to buy the underlying at the specifed (in the option contract) date and price. Long/Put Buyer thinks underlyings price will fall. He has the right (but not the duty) to sell underlying at the specifed (in the option contract) date and price. Short/Call […]
Example: Conventional stock vs put option on stock
Remember: An option to sell a share is also called a put option. So for example the buyer of a put option expects that the price of the stock would fall. Therefore the put option on this underlying stock would enable him to sell this stock (in case the price of the stock really falls) at the higher strike price […]
When can you exercise an option?
Regarding the excercise date there are two main different kinds of options: American options: Can be exercised anytime till the maturity date European options: Can be exercised only at the maturity date.
Example: Conventional stock vs. Call Option on a stock
Example 1: Call option on stock Your call option has a strike price of 10 Euro. The underlying stock has a price of 10 Euro. So if you exercise your call option now you could buy the underlying stock for the market price. Therefore you make no profit. However, you make a loss of 1 Euro if the call cost […]
Characteristics of an option
Options derive their value from an underlying security. Unlike the forward or future, an option is conditional and therefore doesn’t have to take place. Same as a future, also an option depends on a base value. Options are also standardized financial instruments. You can choose your amount, term, and exercise price. Options are sold from a seller (short) to a […]
What should you watch out for? (When doing a hedge)
The following things: Net exposure If you want to hedge several positions, it is advisable that you first calculate the net exposure. This results from a comparison of liabilities and claims (sorted by currencies and due dates).The balance (the net exposure) is used for hedging. Otherwise, you would hedge each position individually which is very complicated. Risk evaluation Value at […]
What is a perfect hedge?
A hedge is perfect once the folowing condition is met: Price change on the spot market (of the security you want to hedge) – Price change on the futures market ( of the contract you use for hedging) = 0 However in reality it’s hardly possible to achieve a perfect hedge. There are several reasons why that’s the case: If […]
Detailed Explenation: What is Hedging?
When doing a hedge one usually intends to secure a spot market position with a counteracting position on the derivatives market. The concept of hedging is usually based on short-term decision scenarios, with the focus on eliminating market risks (eg. price risks). There are several ways to secure (hedge) a spot market position with derivatives: One could do a long […]
Cost of carry
If you acquire a position on the spot market, the entire holding costs – primarily the financing costs – must be borne by the buyer. If, on the other hand, you choose a derivative (eg. a future), then the purchase obligation and consequently also the financing requirement is postponed. Therefore one saves the holding costs (costs of carry). For that […]