Options basics
Sep. 16th, 2024 11:07 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
ny_quantThe holder of a call/put option (the long side) has the right to buy/sell the underlying stock at the agreed (strike) price from/to the seller (the short party, or the writer) before the agreed time in the future called maturity. To acquire this right, the buyer pays the seller a price for the option, known as premium. European options can be exercised only at maturity. American can be exercised any time before maturity. Most options in America are of course American. Unlike stocks, options trade in contracts of 100 calls or puts - that’s the minimum size that you can trade.
Example 1. Stock XYZ trades at 100. I bought a call option with strike $105. If the stock trades above $105 at/before maturity, I can buy the stock from an option seller for $105 and immediately sell it at the current price S in the market thus realizing instant profit S-105 per share.
Example 2. Stock XYZ trades at 100. I bought a put option with strike $95. If the stock trades below $95 at/before maturity, I can buy the stock in the market and immediately sell it to the option seller for $95 thus realizing instant profit 95-S per share.
Both of these situations – when the option holder can exercise them and receive profit – are describes as “options in the money” or ITM. The opposite situation is called “out of the money” or OTM. When the underlying price equals to strike we have an option at the money, ATM. In practice, you don’t have to exercise your options. You can sell them in the market exactly the same way as you bought them.
Conversely, an option seller can only sit and wait, hoping that the options that he sold would expire OTM worthless and he gets to keep his premium. Or he can close his position by buying it back at exchange.
The real question is – how much money you can make or lose on the trade? It should be very clear to you that the definition above translates into very simple formulas for the trade payoff:
Example 1. Stock XYZ trades at 100. I bought a call option with strike $105. If the stock trades above $105 at/before maturity, I can buy the stock from an option seller for $105 and immediately sell it at the current price S in the market thus realizing instant profit S-105 per share.
Example 2. Stock XYZ trades at 100. I bought a put option with strike $95. If the stock trades below $95 at/before maturity, I can buy the stock in the market and immediately sell it to the option seller for $95 thus realizing instant profit 95-S per share.
Both of these situations – when the option holder can exercise them and receive profit – are describes as “options in the money” or ITM. The opposite situation is called “out of the money” or OTM. When the underlying price equals to strike we have an option at the money, ATM. In practice, you don’t have to exercise your options. You can sell them in the market exactly the same way as you bought them.
Conversely, an option seller can only sit and wait, hoping that the options that he sold would expire OTM worthless and he gets to keep his premium. Or he can close his position by buying it back at exchange.
The real question is – how much money you can make or lose on the trade? It should be very clear to you that the definition above translates into very simple formulas for the trade payoff:
P(call) = D *[ max(S-K,0) – p] - commissions
P( put) = D * [max(K-S,0) – p] - commissions
where D is the direction (+1 for buyers and -1 for sellers), S is price of the underlying at the time of exercise (or at maturity for European options), K is the strike, and p is the option premium paid by buyer to seller. We can even combine it in one formula:P = D *[ max(CP*(S-K,0)) – p]where CP = +1 for call and -1 for put and I omitted commissions which are fairly small these days. It’s almost a zero-sum game.Potential gains/losses for buying/selling puts are limited by S, the price of underlying. For calls, they are unlimited. It is useful to have in mind the payoff profiles for calls and puts. I hope it is clear why they look this way.Long Put payoff profile below:
Calls and puts are often combined in various combinations or structures. The important one for us is the
horizontalvertical spread. It involves buying one call or put and selling another with the same maturity and different strike. For example, you are long a spread if your position is long call(K1) and short call(K2), where K1<K2 [typo fixed here] are the respective strikes. As a “homework”, I’d like you to figure out the maximum amount that can be made or lost on a spread trade, and to payoff profile of a spread trade. Если всё это ясно на 100%, пжста отметьтесь в комментариях, или поставьте лайк. Если нет, то напишите свои ответы для самопроверки. Ну и конечно самое время задать вопросы прежде чем мы перейдем к сути дела.
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no subject
Date: 2024-09-16 03:10 pm (UTC)no subject
Date: 2024-09-16 03:11 pm (UTC)no subject
Date: 2024-09-16 03:22 pm (UTC)no subject
Date: 2024-09-16 03:56 pm (UTC)no subject
Date: 2024-09-16 04:36 pm (UTC)no subject
Date: 2024-09-16 05:09 pm (UTC)no subject
Date: 2024-09-16 04:01 pm (UTC)no subject
Date: 2024-09-16 04:14 pm (UTC)no subject
Date: 2024-09-16 05:02 pm (UTC)1. Where does one potential transaction start? Is it the writer declaring, e.g. "I am ready to sell 20K call options for $105 on stock XYZ with maturity on 2024.11.01 !" Or can a potential option buyer (one has to be a "buyer" before being a "holder", right?) announce that "I am ready to buy that many call/put/ options on XYZ stock..." ?
2. The way you wrote it, exercising the option always pursues immediate gain. Does it have to? Say, I have a call option, it's maturity day, and the stock price keeps going up. Can I buy that stock from the seller at strike price and hold it in my portfolio?
3. Unclear on the maturity day: is it something regulated by rules, or designed for each option at origination, or for each transaction? You said that I may choose to sell my option before maturity. When I sell it, does the maturity stay the same? It seems that at any point of time each stock ticker XYZ may have a crapload of options with different maturity/strike price combinations out there in the market?
Just out of curiosity, what's the typical premium on a stock, say, at issuance base $100, strike $110? What's a typical maturity interval (hours, days, months)?
Thanks again
no subject
Date: 2024-09-16 05:34 pm (UTC)2. Yes, you can exercise an option and keep the stock. But this is not a typical scenario. If you believe the stock will continue up you'll make more money holding an option or buying another call rather than tying your capital holding shares.
3. The exchange lists all sort of maturities. You can choose any. From those expiring today, to next week, next month or next year. Most trading is focused on short maturities - a month or shorter. I don't know exactly. Probably google knows.
> It seems that at any point of time each stock ticker XYZ may have a crapload of options with different maturity/strike price combinations out there in the market?
Yes, this is exactly the case.
When you sell your option, someone else bought it (unless they closed their position like yourself) but the properties of the contract don't change, neither strike nor maturity.
> what's the typical premium on a stock, say, at issuance base $100, strike $110?
No such thing. The premium depends on the volatility of the stock. Options on utility stocks are way cheaper than those on chip makers. Even option prices on popular ETFs (market indices) vary wildly depending on market conditions.
no subject
Date: 2024-09-16 05:14 pm (UTC)Put/call spreads in our world if I am not mistaken again.
no subject
Date: 2024-09-16 06:05 pm (UTC)The important one for us is a horizontal spread. It involves buying one call or put and selling another with the same maturity and different strike.
this is vertical one. horizontal spread AKA calendar spread, is two derivatives with different maturity and the same strike.
very good explanation, btw.
no subject
Date: 2024-09-16 06:37 pm (UTC)no subject
Date: 2024-09-16 06:09 pm (UTC)В сущности, покупка/продажа опционов — это спор на деньги, в какую сторону изменится цена акции за период maturity.
Вопрос, применима ли к этому пословица "Из двух спорящих один -- дурак, а второй -- подлец."
И если нет, то как эта неприменимость обосновывается?
no subject
Date: 2024-09-16 06:38 pm (UTC)На философские вопросы пусть отвечают философы.
no subject
Date: 2024-09-16 09:22 pm (UTC)Посмотрите для примера на FX Forward - контракт на совершение в будущем обмена валюты по согласованному сегодня курсу. Можно сказать что это спор на деньги о том какой будет курс в будущем - со победителем и проигравшим. А можно посмотреть на это иначе - обе стороны фиксируют курс, избегая таким образом будущей неопределённости - и довольны сделкой.
Транзакции с опционами не устраняют неопределённость совсем. Но как и с форвардами и у продавца и у покупателя могут быть свои причины для сделки, не являющиеся по сути пари.
no subject
Date: 2024-09-16 11:47 pm (UTC)"Из двух спорящих один -- дурак, а второй -- подлец."
Это не бинарное состояние! До самого конца никто из них не знает кем окажется. Возможны все четыре варианта. :)
no subject
Date: 2024-09-16 09:57 pm (UTC)no subject
Date: 2024-09-16 10:02 pm (UTC)no subject
Date: 2024-09-16 10:13 pm (UTC)max amount gain 0
max amount loss K1-K2
profile: zero for (0,K1), then 45° line down for (K1,K2), and K2-K1<0 line for (K2,infty)
no subject
Date: 2024-09-16 10:25 pm (UTC)no subject
Date: 2024-09-16 10:33 pm (UTC)no subject
Date: 2024-09-17 12:22 am (UTC)Crap, I meant it the other way (K1 > K2)
So we have [0 ... K2 ... K1 ... infinity]
> "profile: zero for (0,K1)"
You need to tell me what happens in each of these 3 intervals but (0,K1) covers two at the same time.
no subject
Date: 2024-09-17 07:10 am (UTC)no subject
Date: 2024-09-17 04:57 pm (UTC)no subject
Date: 2024-09-17 12:13 am (UTC)У вас формат поста съехал после формул. Видимо, не закрытый тэг или его нет.
Если по теме, то всё просто и ясно когда читаешь базовые определения. Но если попытаться применить на практике, то быстро понимаешь что этим нельзя заниматься как хобби. Надо изучать опционы серьёзным образом. Я ещё не видел ни одного человека, который бы успешно торговал опциями в свободное от работы время, если только это не его специальность.
no subject
Date: 2024-09-17 12:25 am (UTC)Я как раз пытаюсь довести читателей до понимания, что опционами можно пользоваться и без rocket science.
no subject
Date: 2024-09-17 12:32 am (UTC)Посмотрел код поста. Там стоит <pre> после параграфа с формулами и до самого конца поста. Получается fixed width font.
Я когда-то работал в trading company, там всем в первый день работы давали книгу в подарок: "Option Volatility and Pricing" by Sheldon Natenberg. Всё очень ясно и хорошо изложено. Но это как на скрипке играть. Надо практиковаться каждый день, чтобы форму сохранять.
no subject
Date: 2024-09-17 12:42 am (UTC)You worked for CTC?
no subject
Date: 2024-09-17 12:45 am (UTC)Нет, местная австралийская компания. Не очень большая и малоуспешная. Но это был интересный опыт для меня. Я всю жизнь больше над всякими технологиями работаю.
no subject
Date: 2024-09-17 01:40 am (UTC)no subject
Date: 2024-09-17 06:19 am (UTC)no subject
Date: 2024-10-01 02:25 am (UTC)Таки смотрю с мобильного - и с середины разваливается форматирование.
База понятна, но как здесь не раз сказали, здесь нужна постоянная практика, насмотренность рынка для правильного определения вероятностей.
Без нее это как пытаться заработать на ставках, не будучи профессионалом, закончится плохо.
Или фиксировать риски в сделках сугубо технически.
no subject
Date: 2024-10-01 02:34 am (UTC)Смотря что делать. Читайте дальше.