I. Physics, Mathematics the finance: Bachelier and the Brown-movements » More!
II. Game: How much does the” FAIN IT!” token worth? » More!
III. Options » More!
IV. Options positions » More!
V. Price fluctuation on the financial markets » More!
VI. Buying volatility, sending volatility » More!
VII. Covering the options undertaking » More!
VIII. The pricing of options » More!
IX. Some edification » More!
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IV. Options positions
The buying or call right is the result of an agreement between the two parties: one party pays in the present (in advance) to the other party in order to buy a financial product in the future, for a price that they have agreed on before.
Let's see an example.
A pays c = 9$ to B so that he can get a certain foreign bill in T =1 year for a K = 100$ exchange rate from B. ( c = call option)
If in 1 year, when the option expires, the exchange rate of the bill is over 100$ A will take advantage of his buying right. So he buys the foreign bill for 100$ from B, who is obliged to sell it to A for the unfavourable price.
If in 1 year the exchange rate is under 100$ A doesn't have to buy the foreign bill, so he loses his 9$.
The selling or put right is the result of an agreement between the two parties, as well. The other party is committed to the buying.
Lets' see an example for this one, too.
A pays p = 6$ to B so that in T = 1year he can sell a certain share to B for a K=100$ exchange rate. (p = put option)
If in 1 year, when the option expires, the exchange rate of the share is under 100$, A will get use of his put right and he will sell his share for 100$ to B, who is obliged to buy it for the unfavourable price.
If in one year the exchange rate exceeds 100$ A won't be obliged to sell the share, but he loses the 6 bucks.
With this we have our options LEGO – set. Hereinafter we will examine 2 positions.
1. In the first example A buys a put and a call right at the same time. Using the figures of the previous example its price is c+p = 15. The position is only profitable if the exchange rate is between 115 and 85 (7th illustration)
In the illustration the continuous lines are the payouts plotted against the anticipated exchange rate for 1 year later. If we take the paid and the earned sums into consideration then we can recognise the possible profits (dashed lines).
2. In the 2 nd example A owns a share and he is worried about its margin. He buys a put right for p = 6$, which can be seen as an exchange guarantee. If somebody is afraid of fortuitous losses in a stock investment then this guarantee can protect his investment's value of falling under a determined level. (8th illustration)
Those money market operators who buy call options are anxious about the price of the product rising. (They are called the hedgers.) Or, they are simply speculating on the rise. Investors that buy put options are thinking on the cortrary: they are afraid of a price-fall so in this way they secure the selling price, or they are speculating on the fall.
Bull-speculators count on the rise and baisse strategists bank upon the price fall.