Options trading is one of the types of trading in the financial markets. According to statistics, the most popular type of options among traders is Put-option, which will be discussed in this article. The reader will learn what a put option is in simple words, about its features, tasks in trading and characteristics. And also in the article examples will be given.
Definition of Put option
There are two types of options in trading on financial markets in exchange trading:
A put option is a stock exchange contract for the sale of a trading asset. Unlike a put option, a call option is a standard exchange contract for a purchase. A put option provides the copyright holder with the right to make sale transactions without any obligation. That is, the owner of such an exchange contract has the right to further sell the selected trading asset subject to pre-agreed conditions.
Put option conditions:
- market price, which is fixed for the selected option;
- validity period of the exchange contract;
- other parameters set by the exchange for a specific trading instrument.
A put option is an opportunity for a trader to trade in selected fixed assets according to pre-agreed fixed conditions. Any option has 2 main characteristics, that is, rights for buyers and sellers, which are very different. Call option holders are not obliged to sell their underlying trading assets, and put option sellers must always fulfill their respective sale obligations under a stock exchange agreement.
Types of Put Options
In today's financial market, put option is a rather complicated investment and financial instrument with great opportunities for trading and investment. It has its own characteristics and characteristics and differs by two criteria: by the term of execution and the duration of the exchange contract.
According to the expiration date, this option can be of different styles:
- European style - the transaction is considered to be completed only on the last day of the contract.
- American style - a transaction can be completed throughout the life of a stock option.
- Asian style (which is rarely used by traders and less in demand).
And besides, exchange contracts are distinguished by types of trading assets:
- Currency options.
- Stock contracts.
- Commodity agreements.
Currency options involve trading in various world currency pairs, and in trading stock and commodity contracts, government and securities (bonds, stocks of companies), various metals (gold, copper) and such commodities as oil, gas, coffee are most often used. , wheat, wood, coal and other species.
Features and basic concepts
As mentioned above in the article, a put option is a contract for sale, and therefore, with its help you can earn in a downward market. Each option has a premium, which by and large is the income of the copyright holder of this contract. Premium is the price that the buyer pays the seller of the exchange option.
Each buyer who bought a put option for subsequent sale, within the expiration of the contract, can sell trading assets only at a fixed price specified in the contract. He cannot choose the most convenient conditions for himself, and in his rights it remains to accept them or refuse to sell. In trading, this price is called the Strike price. As well as in the trading of Put options, there is an intrinsic value, which is calculated as the difference between the prices of a trading asset on the exchange and the execution of the contract.
An option transaction is considered completed, and the contract is executed only after the sale of an investment exchange asset.
Option Models
In modern trading, the pricing of options occurs according to various models, determined by market conditions. The objectives of the put option are factors such as financial risks that can be regulated by pricing models.
Types of models:
- CAMP - financial risk management.
- The Black-Scholes system is one of the most popular models that make it possible to most effectively use the market volatility of the underlying option in trading.
- The binomial system is used to evaluate the contract. Most often, this model is used in the US market, since it is permissible to open and close a transaction at any time before its implementation or expiration time.
- Monte Carlo system - in this model, calculations and mathematical expectation are estimated based on historical data of a trading asset. The bottom line is to find the average value and use it in trading.
- Heston system is used only in the European market. The basis of this model is the hypothesis of the redistribution of the value of the basis, which differs from the average algorithms and takes into account the random value of market volatility.
The Monte Carlo system and the Heston model are considered rather complicated options for calculations, and therefore traders use specialized, often automated indicators and programs. To make calculations in manual mode, it will take a lot of time, and therefore this method is irrelevant.
Put Option Examples
For clarity and better understanding, an example will be considered in the article. Suppose a trader chose Sberbank shares as a trading asset. Their current price is 150 rubles. A trader-buyer acquired a put option, under the terms of which he can sell 450 shares of Sberbank at a price of 150 rubles in the future. Taking into account possible losses (optional price), financial risks will amount to 1000 rubles. This amount is the maximum risk. The profit on the transaction has no limit, but you must consider the option price, that is, minus 1000 rubles.
Further development of the transaction will occur in one of two options:
- With a decrease in market quotes, the asset value decreased and amounted to 140 rubles. In this case, the buyer-trader will use the right to sell the trading asset. Calculations: 150x450 - 140x450 - 1000.
- If stock quotes rise in price, then the trader generally does not need to sell anything lower than the market price. However, do not forget that his loss will still be minus 1000 rubles. The higher the return on the asset, the greater the trader’s earnings, since only a fixed price of 1000 rubles will be taken away from the total profit.
To track the growth or decrease in the price of the selected trading asset, traders and investors use specialized tools, the main of which is the put option schedule.
Finally
The put option allows the right holder to earn less the cost of contact, because if market quotes are lower than the strike price, you can sell the investment asset and stay profitable (under the terms of the contract). They are not subject to margin call, and the trader initially knows his loss.