Short Call (You think the underlying will fall or stagnate in the future) You are obliged to sell an underlying at some point in the future if the option holder exercises his option. You think that the underlying price will fall or stagnate in the future. If the underlying falls the buyer won’t exercise his option and you stay with […]
Long Call (You imagine the underlyings price will rise strongly) You have the right to buy the underlying at a specified date (European futures) or timeframe (American futures) for a specified price. You expect the prices of the underlying to rise (Long). Your risk is limited: The maximum you can lose is the option premium. Example: You buy a Long […]
Long Future If you believe underlying prices will rise. Short future If you believe underlyings price will fall
Institutional clients Banks act as Market Makers (they act as dealers who provide binding buy and sell prices to the market) Other institutional clients Funds etc. often sell Calls on parts of their portfolios (if they want to lock in some profits). Furthermore, they use futures and options for risk management purposes. Retail investors Retail investors often use derivatives to […]
You could make a profit no matter in what direction the market moves You could invest with less capital then you would need on the spot market You could make a lot of profit (by using leverage) With a derivative you could protect yourself against price losses In case of options you can only exercise them if they generate you […]
There are 4 main things that influence the price of an option. First, the intrinsic value. This is the difference between the underlying value (eg. stock price) and strike price. Formula = Underlying price – Strike price. However the intrinsic value cant be negative (as the share price cant be negative). Therefore only the money option has an intrinsic value. […]
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.
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 […]
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 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 […]