In the interesting world of finance and investment we find quantities of alternatives in which to conveniently place our money. One of them are financial options.
The options consist of a contract that gives your buyer (the owner or holder of the option) the right , but not the obligation, to buy or sell an asset, or underlying instrument, at a specific exercise price, on a specific date , depending on the form of the option.
For that right, the buyer will pay a price that is called the option premium . The seller, on the other hand, has the obligation to sell the underlying asset at the exercise price, called strike , on the expiration date of the option, or before, in exchange for the collection of the premium.
The seller has the corresponding obligation to comply with the transaction, sell or buy, if the buyer (owner) exercises his right, that is, executes the option. An option that gives the owner the right to buy at a specific price is known as a call ; when the option gives the right to sell at a specific price, it is then called put . The purchase option is the one used most frequently.
A purchase option would normally be exercised only when the strike price is lower than the market value of the underlying asset, while a put option would do so only when the exercise price exceeds the market value.
When exercising an option, the cost to the buyer of the asset acquired is equivalent to the strike plus the premium, if applicable. When the expiration date of the option elapses without it being exercised, it expires, and the buyer loses the premium. In any case, the premium is an income for the seller, and, normally, a loss of capital for the buyer.
An option in action
Let us suppose that Tesla's shares cost US $ 290 today, and that in a month they will bring a new car to market, which is why we assume that this will increase the value of their shares. We decided then to buy purchase options at US $ 295 for three months, which in the market cost US $ 5 each. This means that, within three months, we will be able to exercise the option, and then the seller will deliver the Tesla shares to US $ 295. By expiration we will have three possible scenarios:
The shares are below the strike (US $ 295): we will not exercise the option and we will lose the premium, since we are not going to buy at that price something that is already worth less.
Between US $ 295 and US $ 300: we will reduce the losses until reaching zero in US $ 300. In this section we will exercise the option, since we will always lose less than US $ 5 of the premium.
Starting at US $ 300 we will always execute the option, and we will also start to obtain benefits.
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Types of options
The most common options are called European and American , also known as "plain vanilla". There are other more complex, called "exotic options", such as bermuda, digital, power, etc.
European ones can only be exercised on the due date. Before that date, they can be bought or sold if there is a market where they are traded, while the American options can be exercised at any time between the day of purchase and the day of maturity, both inclusive, and outside the market in the market. that are negotiated.
Advantages of investing in financial options
The main advantages of investing in financial options are:
Minimum investment: there is no minimum amount of investment in options.
Losses: the maximum loss is that which is paid for the premium of the option.
Risk: the risk for this type of financial product always depends on the one that the investor is willing to take.
Coverage positions: investing in options allows you to take hedging positions against market movements.
American Options: American operations can be exercised at any time.
Benefits: the investor can obtain benefits not only with the variation of the price of a financial instrument, but by correcting the future forecasts of the market.
Options in Plus500
Plus500 , one of the largest online brokers in Europe, is primarily a CFD broker. It offers a complete catalog of more than 2,000 financial instruments such as stocks, stock indices, Forex currency pairs, commodities, etc. It also offers the opportunity to trade with options.
Plus500 offers options on the following stock indices:
Dax 30 from Germany
S & P500 United States
CAC 40 from France
MIB 40 from Italy
AEX 25 from the Netherlands
You can see here a complete list of this type of instruments in the Plus500 platform.
In Plus500 you can locate available CFDs about options. The operation is like any CFD, but on a series of options of purchase (call) and sale (put) created by the broker.
Trading on these options consists of opening a position with the available tools.Once the position is open, we can wait for the expiration date, or advance its closing at the time we consider it appropriate.
Plus500 is an online broker authorized and regulated by the FCA (Financial Conduct Authority) of the United Kingdom. Apart from offering options trading through a simple and intuitive interface, the platform has more than 2,000 CFDs with which to operate.
It also has quick withdrawals and no commission, and the possibility of opening a totally free Demo Account , which allows us to familiarize ourselves with its characteristics before operating with a real account.
