What is an option contract? [Tất cả thông tin mà bạn cần biết]

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2021-03-23 13:36:16

Options contract (options contract) is an agreement between the buyer and the seller. Investors have the right to buy or sell an asset at a specified price. The price in the transaction is predetermined in the contract.

This is a derivative investment. It gives you the right but no obligation to trade in a basic investment. Based on an asset base as warranties electronic money, real estate, stocks or commodities, …

See also: What is Binance Options? [Hướng dẫn giao dịch quyền chọn từ A-Z]

Options contracts have a specified expiration date. You can choose to exercise your option earlier or at a specified time. Many investors never consider options contracts, believing they are too risky. However, you can also use options contracts to reduce overall portfolio risk and provide insurance for some unforeseen circumstances.

How does options contracts work?

Types of options

There are two basic types of options:

  1. Call option: Allows the purchase of the underlying asset at a certain time at a certain price.
  2. Put option: Allows the sale of the underlying asset at a certain time at a certain price.

Two options have Common point Both can be bought for speculation in the direction of stocks, or sold to generate income. Corresponding to two positions of buyer (long-buy) and short-sell. You refer to compare the differences:

Information in options contracts

Options contract includes the following basic elements:

  • Option Type (call option or put option to sell-put option)
  • The strike price: A preset price at which an option contract can be bought or sold when exercised.
  • Option fee: Buyer pays option fees for contractual rights. Every call option There is a bullish buyer and a discount seller. While the put option There is a discount buyer and a bullish seller.
  • Implementation date: The current date in which the contract is being executed.
  • Contract expiration date: The last date on which the contract takes effect. On before this date, investors will decide what to do with their expired positions.
  • Number of contracts

Investors will buy and sell options for a variety of reasons. Option speculation allows a trader to hold a leveraged position in an asset at a cheaper cost than buying the asset’s stock. Investors will use options to hedge their portfolio risk. Hand holders can make a profit when they buy the call option or become a seller of the option.

An American option can be exercised at any time prior to the option’s expiration date. Meanwhile, European options can only be exercised on the expiration or exercise date. Exercise means using the basic buy or sell security.

Greek Indices (Greeks)

These indicators describe the risks associated with holding option positions. Specifically summarized as follows:

  • Delta An index comparing the price change of an asset. Example: If the option has a Delta of 0.5, which means that if the price of the asset goes up at a price of $ 1, the option premium will increase by $ 0.5, under the same conditions.
  • Theta denotes the rate of change between the option fee and time. Theta says the option fee will decrease or increase when the contract expiration date is reached. Example: Theta is -0.50. The option fee will be reduced by $ 0.5 per day that passes. If two trading days pass, the value should theoretically fall by $ 1.
  • Gamma denotes the rate of change in the delta index of the option and the price of the underlying asset.
  • Vega shows the amount of the option’s price change with a 1% change in the implied movement.
  • Rho denotes the rate of change between the value of the option and a 1% change in interest.

The return, risk, option contract strategy

I will statistic in two cases. For each option, how the risks and profits happen to the buyers and sellers. Accompanying that will add strategies that investors use to increase profits and reduce risks.

No more wordy, let’s go to the topic too:

Buyer call option (Long Call)

Profit

The buyer of the call option is increasing the price of the stock and believes that the share price will rise above the strike price before the option expires.

If the share price rises higher than the strike price. Investors can choose to buy shares at the strike price and immediately sell shares at the current market price to make a profit.

Risk

If the underlying share price does not move above the strike price before the expiration date, the option will expire nullly. The contract holder is not required to buy the stock, but will lose the option fee paid for the call option.

Short Call seller

Profit

Selling call options is called the contract writer. They receive an option fee. Or, an option buyer pays an option fee to the writer or seller of an option.

Maximum profit is the cost of the option received when selling the option. An investor sells a call option and believes that the underlying share price will fall or remain relatively close to the strike price of the option.

If the current share price is equal to or lower than the strike price at expiration. The option will expire for the buyer of the call option. Options sellers receive the option fee as their profit. An option is not exercised because the buyer of the option will not buy the security at a strike price higher than or equal to the market price.

Risk

If the market share price is higher than the strike price at expiration. The seller of the option must sell the stock to the buyer of the option at a lower strike price. Or, the seller must sell the stock from holding their portfolio. Or buy shares at market price to sell to the buyer the call option.

The contract writer must bear the loss. That loss depends on the cost base of the stock that they must use to pay for the option. Plus any brokerage ordering costs, but less than the option fees they receive.

The caller’s risk is much greater than the caller’s risk. Buyer options pay only the option fee. The writer faces a lot of risks because stock prices can continue to make huge losses.

Buyer put option (Long Put)

Profit

The buyer of the put option wants the price of the stock to decrease. So the put option is profitable when the share price is lower than the strike price. If the market price is lower than the strike price at expiration. Investors can perform put-through transactions. They will sell the stock at a price higher than the strike price.

Their return on this trade is the strike price below the market price, plus the cost of the option fee. Or any brokerage commissions to order. The result is multiplied by the number of options contracts bought, then multiplied by the number of shares the contract represents.

Risk

The value of holding the put option increases as the share price falls. In contrast, the value of a put option decreases as the share’s price increases. Risk of buying the put option is limited to the loss of the option fee if the option expires in value.

Seller’s put option

Profit

If the closing price is higher than the strike price before the expiration date. The put option will expire without value. The contract writer’s maximum profit is the option fee. The option is not exercised because the buyer of the option will not sell the stock below the market price.

If the market value of the security falls below the exercise price of the option. The caller is obligated to buy the stock at the strike price. Or, the put call will be exercised by the buyer of the option. Buyers will sell their stock at the strike price because it is higher than the market value.

Risk

The writer’s risk occurs when the market price falls below the strike price. At the end of the option, the seller is forced to buy the stock at the strike price. Depending on the number of prized shares, the option writer’s loss was quite substantial.

The seller can hold the shares and expect the price to rebound from the buy or sell price and incur losses. However, the option fee will partially offset the loss.

Evaluate the pros and cons of options contracts

Advantages

  • A buy option has the right to buy the asset at a price lower than the market price when the share price increases.
  • Options buyers can make a profit by selling stocks at the strike price when the market price is lower than the strike price.
  • The seller of the option receives an option fee from the buyer for writing the option.

Defect

  • The market price falls. Sellers of put options may be forced to buy the asset at a price higher than what they would normally pay in the market
  • Call writers face great risks if the stock’s price increases significantly and they are forced to buy the stock at a high price.
  • Option buyers pay an upfront option fee to the option writer.

summary

So CHK has sent you the article about “What is an option contract? Everything you need to know ”. Please make your own strategy and outlook. Articles are general knowledge and knowledge synthesis, not initial advice. Hope you are a successful investor.

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