Option is a word that came to us from the English language. Its meaning is “opportunity,” and it can also mean choice. Both options are combined with the phenomenon that the word “option” means in trading on the stock exchange. The term may describe a situation where two parties enter into an agreement, indicating the cost and timing of the sale of an asset. The agreement assumes the right to such a transaction, but does not oblige it, the final decision remains with the participants. Today, stock and over-the-counter options have become important investment tools used by all top players.
General view
Stock options brokers offer the following deals:
- bilateral;
- implementation;
- the acquisition.
Options may be:
- stock exchange;
- over-the-counter.
Exchange: conclude contracts
Exchange binary options are sold as part of agreements concluded between the participants. Such arrangements are usually standard, determined by the conditions of work on a particular exchange. Simply put, it is the trading platform that sets the standards to which the concluded transactions must comply. Due to such strict regulation of the workflow, feedback on stock options is mostly positive - fraud is virtually eliminated, but it is important to carefully read the terms of the proposed option.
What depends on the participants in a particular transaction? By concluding an agreement, they themselves choose how big to award a prize. When the contract is the subject of trading in the stock options market, the seller will additionally have to pay a margin fee.
Features of work
Standards, parameters, classic for stock options:
- repayment period - usually within 24 months;
- There is an extreme contract period of time, usually 3 months;
- a predetermined transaction volume, while the difference between the sale and the purchase is quite small;
- total control over all operations, which minimizes the likelihood of non-payment;
- publicly declaring prices, implying an open workflow.
Trading stock options involves the conclusion of various transactions. If prices, dates differ, each such transaction is a separate, completely independent contract. Work on the exchange is notable for the simultaneous purchase of only one contract. More options exchange options are not allowed to make.
And what else are there?
Since trading in exchange options is practiced, it is logical to assume that there are also over-the-counter options - otherwise such an updated name of transactions would not be necessary. A distinctive feature of over-the-counter options is the absence of a strict standardization system introduced by the exchange, i.e. the conditions are free.
Distinctive features:
- long period of action;
- there is a probability of refusal to pay;
- terms, volumes, rates - all these issues are decided by the participants themselves in the course of communication;
- cost is disclosed only to participants in the transaction.
Good or bad?
In general, training in stock options helps to master over-the-counter options over time, but the latter are considered more difficult to conduct business and are recommended only to experienced market participants.
Mostly over-the-counter options are bought by “financial sharks”, rather large institutions, and sold by investors working on a large scale. Over-the-counter - these are much more flexible tools for making profit than stock options, but it’s more difficult to use them.
Theoretical basis
Stock options are also known as free-forming contracts.They are concluded if there are certain assets on the exchange that one participant wants to sell and the other to acquire. It is possible to conclude a transaction under a futures contract. The rules allow execution both for the selected time period, and within the boundaries of it. Amounts paid in transactions are commonly called premiums.
In many ways, the types of exchange options practiced these days are close to futures contracts. To navigate the market, you need to know the internal terminology. For example, a sale involves concluding an agreement on the conditions that the seller promotes, and a purchase involves taking into account primarily the buyer's desire.
We work: profit is not far off
As follows from modern practice, options can be concluded on any contract, asset. The conditions are standard, but the price may vary. Sale is free, purchase is also, but the rules and mechanisms introduced for futures contracts are taken into account.
There are two types of options, they are most widely used in the financial market in recent years. This is buying (calling) and selling (put). The first assumes that the buyer has the right to buy the asset, but no one obliges him to do so. In the second case, there is a right to sell, but still no one imposes obligations.
You need to know
If, as part of an agreement, a person acts as a buyer, he is called the owner, holder. The seller is indicated by the prescriber, subscriber.
The duration of the agreement allows the introduction of the division of options into groups:
- American, executed at a convenient time, until expired;
- European, executed exactly at the time of completion.
You can also introduce a classification system, evaluating the exchange assets forming options:
- commodity (as the name implies, the basis is a commodity, often precious metals);
- currency, involving transactions with the acquisition of currency and its sale;
- stock, where stocks, indices become assets;
- futures, when implemented, acquire the relevant contracts.
What to look for?
When talking about stock options, they often compare them with futures contracts, because they really have a lot of similar features. But there are important differences worthy of attention. In the classic version of a futures contract, the price depends on the asset on which the arrangement is based. But with options, this role is played by the premium negotiated by the participants in the transaction. The buyer gives a premium to the seller, as he allows the market participant to choose, exercise the option or refuse, if the performance is associated with losses.
When working with options, the pricing mechanism involves doubling the values. There is a negotiable premium, and the performance of option obligations is governed by how large the assets on the exchange are. This means that the option has two parameters: price (premium) and strike price (exercise). The main idea of such a system is that the contract allows you to sell, acquire assets and make profit through it. There is also a reverse operation on exchange options (it is a mechanism for saving money in the event that the transaction is unprofitable, and one of the parties seeks to return everything to its original conditions).
Why is it worth working this way?
When opting for stock options, a market participant gains access to a variety of benefits. Among them, there are several that seriously weigh the scales in favor of this particular option of earning money on the exchange. And first of all, it is about profitability.
Operations involving the use of options really bring more income than the bulk of financial instruments available on the stock market. At the same time, for each option you have to pay a very small amount, and the profit that you can put in your pocket at the same time turns out to be several, or even tens, hundreds of times more.
For examples: suppose there was a share of a certain company A, which cost a conditional one hundred rubles. The premium for the right to purchase this share was 10 kopecks, but after a while the share became more expensive by the ruble. As soon as a market participant exercises the rights available to him, he makes a profit of one thousand percent on each share, since he sells the share for 101 rubles.
What else can you count on?
Choosing stock options, thereby a market participant decides in favor of transactions with minimal risk. As a rule, the amount of risk is the amount of the premium or even less. But the profit that can be obtained from such an operation ideally has no restrictions at all.
When the costs of the option are calculated, you need to additionally calculate the commissions that the intermediary withdraws, as well as state taxes. But taxes, commissions are not for all contracts, it is only possible to receive a tax deduction subject to certain conditions, which makes the work more profitable.
Choose what we want
If an individual or legal entity has decided to work with exchange options, it gets the opportunity to choose from numerous options for strategic planning of activities. You can implement, acquire options that vary greatly in cost, time constraints, you can practice a variety of combinations, finding for yourself the most profitable option.
If you opt for stock options, you can start working in different markets and conduct it equally successfully. You can conclude futures contracts and work with stock options, grabbing pieces everywhere and immediately. Such a combination becomes a source of decent earnings for a fairly short time period. This looks especially advantageous against the background of the fact that operations are generally carried out according to the same system as futures.
Options: where did it all come from?
Have you come up with stock options in particular and options in general? Of course, in the form in which this system is familiar to us now, it was developed relatively recently, but the idea itself comes from ancient times - even in ancient Greece there was a system similar to modern options. These are not empty words: the writings of Aristotle that have come down to us confirm this fact. So, he talks about how Thales successfully speculated, trying to prove that poverty can easily be eradicated if you attach your mind, and the Greek philosophers were in poverty not because they could not earn, but simply were not interested in it.
What did Thales do? He had good knowledge of meteorology, which allowed him to correctly assume a good olive crop. At the same time, Thales had a rather small amount of money. I used their philosopher to rent squeezing presses used to produce oil. The scientist turned to those owners who strongly doubted that their mechanisms would work in the coming season. Thales invested money in the press and thereby acquired in the future the right to use the equipment when he saw fit. However, the terms of the agreement involved the loss of money if there was no work. The new season has come, the weather has been a success, the olives have gone wrong, the press has got a job, and Thales has leased them to those who had olives. So I made a good profit.
Tale is a lie, but a hint in it
Others are convinced that this story is nothing more than a myth. For example, modern scholars rightly doubt that in ancient Greece the truth could be predicted in six months. But if we ignore the idea of matching historical truth, we can see the logic of options in action. There is a certain deal at stake - whether it’s pan or gone. By approximately the same logic, modern "put" type stock options work.
By the way, this is not the only description of analogues of modern options that came to us from ancient literature.Surprisingly, a reference to them can be found even in the Bible, in the part that describes the relationship of James and Laban. The first was asked to marry Rachel, for which he would have to serve seven years. This reflects the risks typical of options, where one of the parties may fulfill obligations, or may refuse to do so. So, after seven years, Laban still refused Rachel’s hand to the supplicant, instead trying to give another daughter.
Options: work for profit
In many ways, the history of the development of stock options is similar to earnings on futures. They appeared and developed, as farmers were looking for possible methods to reduce the risks associated with crop failure. Successful dealers could save well, trade relations developed, which became the reason for speculative operations, exchanges, assets. In the Middle Ages, this could be seen in European countries, a particularly striking indicator is the Antwerp exchange, and in Asia, rice was the main asset. An example is Osaka and its Exchange Boomers. Well, then tulips came, a real mania began on them, which became an important impetus in the development of exchange trading and options in particular. Then, numerous contracts were concluded, under which they sold the right to purchase bulbs at a fixed cost. Since they sold the rights, but no one imposed obligations, then the businessmen worked on the system of options rather than futures. When the time came X, sellers and buyers either exercised their rights, or found themselves out of it.