Options Fundamentals
Sixty Eighth session of Forex Training
Welcome back to Forex professional training in financial markets.
In this session Option Fundamentals and the differences between them will be studied thoroughly.
Option, Option and Call/Trading Option Differences
Option is a defined contract between a trader and the company, that provides trading services, in which trader buys an underlying asset voluntarily, to buy or sell that asset at a particular price or after a specified amount of time.
Considering that there is no preset price of sell and buy for the trader until the expiry date of the contract, there is no definite profit on that contract.
The amount of profit goes up if the asset has reached its desired price before the expiry date and the trend is continuing its direction.
The contract is defined by strict terms and conditions.
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Call and Put Options
Options can be categorized into two types: Call and Put. Purchasing a Call option represents that the trader expects the asset price to increase before an appointed time.
On the contrary, if the trader supposes that the price of the asset in question will decline within a certain period of time, he/she buys a Put option on that certain asset.
If the price of the purchased asset crosses the ‘strike price’ (price exercised in the contract) at the end of the expiry date, then the trader will gain profit, otherwise the ‘premium’ paid by the trader will be lost.
Comparing with trading in Forex market, purchasing a Call is like buying, whereas purchasing a Put is the same as selling.
Associated with the market, there are four types of attendants based on their engaged position:
- Buyers of Calls
- Sellers of Calls
- Buyers of Puts
- Sellers of Puts
People who purchase Call/Put are called Holders and those who sell Call/Put are called Writers.
Call/Put buyer or holder is not obliged to purchase Call or Put, however, Call/Put seller or writer must sell Call or Put and must make a promise to buy or sell.
Unlike trading in Forex brokers, there is no leverage represented by Option and Option providers. Hence, the risk of losing huge chunk of your money in an Option contract is lower than a trade on a pair in Forex market.
Call and Put Option
Call and Put Option is a type of Option, which has the same definitions, such as premium, strike price and expiry date.
The difference between Option and Call and Put Option is the contract premium that is chosen by the trader in addition to the shorter expiration timeframe.
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Numerous Option Providers are represented through Option section of our website.
Ample reviews, including their regulation, payment method, supporting language alongside their advantages are all described for your convenience.
Here are the differences between Option and Call and Put Option:
Expiration Time
Option can present short term contract period, such as one hour expiration period.
Traders can make instant profit with more available timeframes and more flexible investment selections.
While time expiration of Option can be weekly, monthly or even longer, time expiration of Option can be less than minute to a few days.
For Instance, 24Option is one of the most famous Option providers, represents contracts with less than 1 minute Expiration time.
This is beneficial and favorable for traders with a fast trading manner.
Payout
The Option providers Payout at percentage of the premium chosen by trader if all the conditions of the contract are met, the price of the asset stands on or crosses the target price at the expiry time.
This indicates that trader achieves fixed amount of profit even if the price passes the target price considerably.
Contract Termination
Unlike Option trades, in a Option a trader must stick with the contract until the expiration time, hence Option requires careful consideration and regard.
Some Option providers allow their traders to extend the expiration time, roll over option; also, others permit their traders to close the winning positions prior to the expiration time to cut the assured profit.
Now let’s check the examples of how Option and Call and Put Option work.
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Call/Put Profit and Loss Calculation
On 21th of February, the stock price of a company was $115 and the premium was $8 for 11th of April with strike price of $124.
This indicates that expiration date is 11th of April and the total price of the contract is $2*100=$200 (remember that a stock option contract is to buy 100 shares).
The $124 strike price shows that if the stock price is less than $124, your Call option is worthless.
Considering the premium you paid, $200, you are already losing $200. Until 2th of April, stock price reaches $128.54.
Your profit is calculated this way:
$128.54 – $124 = $4.54
$4.54 * 100 = $454
$454 – $200 = $254
This shows that until 2th of April your profit is $254.
On 11th of April the stock price of a company declines to $109.99, then the contract expired at the end of 11th of April.
Eventually profit made by 2th of April has vanished, and you lost the premium you paid on this contract, $200.
Call/Put Options Profit and Loss Calculation
The procedure of profit calculation in Option is quite different.
For instance, you want to trade on a pair, USDCHF, which has the rate of 0.9644.
You predict that the rate will go up until next week.
By checking the Option provider platform and you see that the Payout on a 1 day contract for purchasing Call on this pair with current strike price, 0.9644, is 85%.
Selecting a $200 Premium, and the contract on this pair with specified amount of Premium, expiration time and target price are completed.
If the price on the expiration time (1 day) rises above the strike price, you will gain profit, $200 * 85% = $170, in addition to the Premium you have paid, $200.
On the other hand, if the price falls under 0.9644, strike price, your loss will be limited to the Premium.
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Full vs. Zero fruit
At the end of the contract you dealt, the commission section shows your revenue.
PROFIT
If market trends and price movements meet the contract condition you predicted, you achieve the profit dealt with the provider alongside retrieving the Premium deducted from your account fund.
LOSS
A zero volume indicates that you have lost the deal and the Premium, which was deducted from your account fund, is taken as a compensation for your loss.
That concludes this session, until next time and another session take care.