The price of an option.
After the Options general introduction in the first post, we have seen how call options and put options work. Now, in order to get the whole picture, its the moment to understand a bit better how to determine their price.
I’m telling you in advance: if you are looking for an endless sequence of mathematical formulas, you will be disappointed. Please, consider this is an introductory guide and not an academic course, but I want to help anyway. If you are looking for the theoretical demonstrations go here or here and enjoy them.
Having said this, we can start with a simple observation. A financial instrument quoted 10 right now is more likely to rise to 11 than to 15 and, considering decreasing trends, it works exactly the other way round. Starting from 10, our security is more likely to fall to 9 rather than to 5. Read more…
Tagged as:
financial options,
greeks,
price,
trading
What Call options are.
In our general introduction we have seen that options, when used with speculative purposes, are completely comparable to bets on an uncertain future event, while the key difference from normal securities is that their value depends from another financial instrument.
In other words, when you buy for example a share you are betting on a company’s trend directly in real world economy while when you buy an option your focus is on the share’s value. We can say at a glance that they are financial instruments who’s value depends from other financial instruments’ trend. In fact they belong to the derivatives family.
But what really makes options unique in the derivatives landscape is the pay-off structure. Just to make things immediately clear, what is a pay-off…? Nothing easier to explain: when and how much you make profit or loss. So let’s start immediately by seeing how Call options work and then we can analyze Put options.
Read more…
Tagged as:
call options,
expiring date,
pay off,
premium,
strike price
Trading with options.
If you’re thinking about trading with options and you don’t know where to start from or simply you would like to understand better what they are and how they work in a speculative context, this small guide is exactly what suits you.
If vice versa you need to create some structured operation on the forex market, on some index or interest rate… well you would be better buying the Hull, start from page 1 and go thorough it till the end. Believe me, you will enjoy yourself a lot among caps, collar, future and swap: 300 pages intriguing formulas.
But actually there’s also another way. Tomorrow you have the examination on derivative instruments at the university and your last chance to succeed is to get some quick and handy information on the web, leaving everything else in the hands of hope and luck.
Well in this case, my suggestion is to read the tutorial, drink a cup of coffee and study on your school book all night long. For this kind of examinations, I’m sorry but you are usually required to know how to calculate a couple of things which are unnecessary for trading and will not be reported here. (…by the way, good luck…!). Read more…
Tagged as:
call,
derivatives,
Options,
pay off,
put,
underlying
After the Options general introduction in the first post, we have seen how call options and put options work. Now, in order to get the whole picture, its the moment to understand a bit better how to determine their price.
