Understanding the Options Market Basics
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ScribdTranslationsUnderstanding the Options Market Basics
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ScribdTranslationsOPTIONS MARKET.
An options market is one where derivatives are traded.
financial, where two or more agents agree to buy and
sell respectively an amount of an underlying asset, to a
price and at a specific date.
In the negotiation ofoptions, each of the parts has a role that
it relies on the counterpart, in such a way that the acquirer of the option.
buy a right (you are never obliged to exercise it) on the asset in a
a specific date between the parties and at a exercise or strike price, that
it is the price at which the selling party will have to sell the asset
regardless of the quotation or value of it at that moment, and to
The buyer can exercise the right (or let the opportunity pass).
to buy that asset at the price that was determined in the past in the contract
CIRCUMSTANCES PRESENTED IN THE OPTIONS MARKET
Purchase of a call option: gives the buyer the right to acquire
a certain asset at an exercise price during or before the
expiration in exchange for the payment of a premium. It has losses.
limited liabilities and unlimited profits.
Sale of a purchase option: obliges the seller to sell a
determined well at the agreed price before the expiration at a price
fixed. It has unlimited losses and limited gains (premium).
Purchase of a put option: gives the buyer the right to sell the
underlying asset at the price set beforehand or at
expiration. It has losses limited to the premium and gains
unlimited.
Sale of put option: the seller is obliged to buy a
determined asset at the agreed price. It has limited profits
(first) and unlimited losses.
CONCEPTS
- Exercise Price (E): It is the price agreed upon in the option and is paid at expiration of the
contract (Strike Price).
- Premium (C): Amount paid by the option buyer and gives the right to exercise or not.
exercise the option on the expiration day (The Premium)
- Expiry Price (S): It is the market price of the asset at expiration.
contract, depending on this; the option will be exercised or not. (Current Market price)
Advantages of investing in options
The main advantages of investing in options
financial are:
Minimum investment: there is no minimum investment amount
in options.
Losses: the maximum loss is the one that is paid for the
option premium.
Risk: the risk for this type of financial product
it always depends on who the investor is willing to
run.
Hedge positions: investing in options allows
take hedging positions against movements of
market.
American Options: American operations can
to be exercised at any time.
Benefits: the investor can obtain benefits not only
with the variation in the price of a financial instrument,
without accurately predicting future market forecasts.
Disadvantages of investing in
options
Among the main disadvantages of investing in
financial options are found:
European Options: European options can only
to be exercised at the time of expiration.
Volatility: options can have a high
price volatility putting investment at risk.
Greater knowledge: investing using this product
financial requires a greater knowledge of the market in
relationship with other types of financial products
TYPES OF OPTIONS.
- Buyer of the Put option (long):
You have the right to deliver the underlying asset to the issuer.
Deliver the asset if the option is exercised.
Pay the premium (c) to the issuer
- Receive the Exercise Price (E)
- Issuer or seller of the Put option (Short):
- It is obliged to receive the underlying asset if required to do so by the
option buyer.
- Receive the bonus (c)
- Pay the exercise price (E).
On the Due Date
The Buyer of the option can:
- Exercise the right by buying or selling the assets that the option allows you to.
- Let the expiration date pass without exercising the option.
- Sell the option before its expiration in the secondary options market.
- Options contracts are generally closed before the purchase operation.
sale is exercised
WHAT ARE UNDERLYING ASSETS
Options are traded on the markets regarding:
- Stock Options
- Options on Currencies
- Options on indices
- Futures Options
- Options on Commodities
Contracts are negotiated on Options Exchanges, where there is a clearinghouse and
margins of guarantees are required.
Contracts are based on standardized quantities of the underlying asset or on
multiples of the same
- American Options: An option that can be exercised at any time until
the expiration date
- European Options: An option that can only be exercised on the date of
expiration and not before
Valuing an option is one of the major tasks in the derivatives markets.
probabilistic.
- COVERAGE WITH OPTIONS
Hedging involves taking a position opposite to the one exposed to risk.
There are three basic forms of coverage with options aimed at:
- Limit the risk of a portfolio.
- Increase profitability.
- Take advantage of market volatility.
OPTION VALUATION.
- In finance, a price is paid or received for the purchase or sale of options.
This price can be divided into two components. These are: Intrinsic value
Temporal value.
INTRINSIC VALUE.- The intrinsic value is the difference between the underlying price and the
strike price, referred to the extent to which this favors the option holder
TIME VALUE. The option premium is always greater than the intrinsic value. This
Extra money is to cover the risk that involves the writer/seller option. This is
it is called Time value
OPTION VALUATION THEORY
The option valuation theory is an economic study framework that deals with
study of the performance of financial assets, whose profitability depends on other assets or their
prices and in a framework of probability.
Study aesthetics developed in the late 19th century. However, it was in the following century that...
What new models and advancements in economic studies were highlighted, especially regarding work.
by Fischer Black and Myron Scholes in the 1970s.
These models are used to determine the economic value of financial assets.
derivatives in relation to their yields and their risk. Thus, the option pricing theory has
served to carry out valuations of debt securities, warrants, or even patents, among other things.
many others. See options lost.
The very nature and structure of an option make it necessary to create valid techniques for
calculate their current values. Therefore, more common techniques based on updating
Future flows such as NPV and IRR are not suitable.
Similarly, this theory can be useful in investment analysis in the same way.
methodology. Alternatively, in the strategic field it also remains relevant by helping in the
study of the allocation of resources carried out by a company, such as valuing its funds
own and assess their exploitation.
It is especially important because it helps to support financial decisions, optimize
investments and the calculation of dividends with the measurement of risk. Thus, it follows the principle
economic of maximizing the profit and wealth of shareholders.
THE BLACK AND SCHOLES MODEL AS A REFERENCE FOR OPTION VALUATION THEORY
It is a financial mathematics methodology created by Robert C. Merton as a result of
the studies of Black and Scholes in the field of valuation. Their initial objective was
to know the values of European call options written on a stock, but their use
it was quickly extended to other derivatives.
Thanks to his studies, he created a mathematical model for a very approximate estimation of values.
in the current stock option that was quickly accepted and extended in the
financial and economic world thanks to its precision and simplicity.
This model analyzes the value of options based on the price of the underlying asset of the option,
which follows a continuous stochastic process of Gaussian-Wiener evolution, with mean and variance
snapshot constants.
The fact that this technique focuses solely on the study of volatility explains its
Mathematical simplicity, assuming other variables such as the price of the underlying are fixed,
interest rate or maturity.
Option pricing theory has experienced a pronounced development in recent decades.
advance, with its corresponding modification and development due to the significant evolution in
the same period of the different financial assets that have emerged in the market,
increasingly complex. That is to say, new valuation needs have arisen.