Options are among the most lucrative financial instruments for forward transactions on the stock exchange. Unfortunately, in addition to high returns, they also entail an above-average level of risk. Options are not necessarily recommendable and also not an easy topic. Those who are nevertheless interested in the asset class will certainly find many answers to their questions in this article.
Today we would like to explain the option put call by means of an example. Here we must emphasize that options are a complex financial instrument and the risks are high. If you want to write or buy options in the future, you should inform yourself outside of this article very well about how it works and perhaps even practice with it theoretically first.
The focus of this post is: option trading - let us know in the comments if you have any questions about the topic!
Call put options belong to the category of derivatives. They always refer to an underlying asset.
Anyone who wants to trade options is basically trading rights. The Strike Price is a predetermined price at which the right bought or sold may be exercised. The seller of an option is called Stillhalter.
In the case of put options, both parties, buyer and seller, expect the price of the underlying asset, for example a share, to fall.
Suppose you buy a put option. Then you buy the Lawthe Underlying to sell at a certain time and at a certain price. In other words, you expect the price of the underlying asset to fall in the future and are protecting yourself and your profits or wealth by having the right to sell at a certain price.
In order to buy an option, you have to create a so-called Option premium pay. This premium depends on a variety of factors. For example, on the Remaining term or volatility of the underlying.
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The sale of a put option is called a Short Put. The writer (seller) of a put option receives an option premium for the sale. This is the premium that the buyer must pay if he wants to trade options.
In return for the premium, the seller is obliged to buy the underlying asset from the option buyer at a specified price and at a specified time, if he so wishes (exercises his right).
You hold 100 shares of Swiss Re Now you want to buy a put option to hedge your investment against falling prices. An option contract always represents 100 shares. You buy a put with an end date of 30.08.2021 and a strike price of CHF 45.
You pay a commission of CHF 0.50 per share. This results in a total cost of CHF 0.50 * 100 = CHF 50. If the value of your shares falls continuously and is quoted at CHF 0.50 per share at the time of the closing of the trading day, you pay a commission of CHF 0.50 per share. Stock Exchange below CHF 45 on 30.08.2021, you can exercise your right and transfer your shares to the put seller for CHF 45.
This is particularly worthwhile if the share is quoted at CHF 35, for example. This way you have cushioned a loss of CHF 10*100 shares = CHF 1,000.
If you look at the example from the seller's perspective, then by selling a put you would have entered into the obligation to buy 100 shares of the put buyer at a price of CHF 45 on 30 August 2021. For this commitment, however, you would have received CHF 50 as commission in advance. You are entitled to this commission and it cannot be taken away from you again, regardless of how the option develops.
With a call option there is also a Long (Call) and Short (Call) Position. Here, too, rights are bought and obligations are sold in return.
The so-called short call refers to the sale of a call option. As the seller (Stillhalter), you undertake to assign the underlying asset to the option buyer at a certain price and at a certain time. In return, you as the seller receive a Commission. The difference to the put is that you already own the shares in the best case.
If you buy a call option, you open a long position. You are therefore assuming that the price of the underlying asset will develop positively and rise. As the buyer, you have the right to buy this underlying asset, as in the previous cases, at a predetermined price. Strike Price for sale.
For the purchase you pay - as with the put - an option premium to the call seller. The long call is suitable for various scenarios. For example, if you do not yet own the underlying and you only want to buy it for a certain price.
Would you like a concrete example of options trading? The initial situation is the same as in the put example: Swiss Re Share á CHF 50, commission CHF 0.5 You sell a call option at the strike price of CHF 55 with expiry on 30.08.2021. For this you receive CHF 50 as commission from the buyer.
If the underlying is below a price of CHF 55 at the time of the market close, you can keep your shares and at the same time you have won CHF 50 as commission.
Would the Share Swiss Re is now quoted at CHF 57, you would have to sell your 100 shares to the option buyer at the price of CHF 55. You can keep your commission. You only lose the price gain from the difference between the strike price and the underlying at the closing price, i.e. CHF 57 - CHF 55 = CHF 2*100 = CHF 200. Your risk of loss in this example is 200 Swiss francs.
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Options trading with puts & calls is multi-faceted and can offer attractive returns. If you do everything right, you can build solid positions with options and earn returns with them on a monthly or weekly basis. The commissions in the examples are very low. In reality, they are often several hundred francs that you can "earn" as a seller.
On the other hand, options are absolutely beginner-unfriendly and not suitable for newcomers. You can build up certain hedges for your portfolio with options - if you know what you are really doing. Besides all the risk involved with these instruments, one should not forget the fees. A hedging strategy that is so expensive that it "eats" the return is probably missing its purpose.
Again, we would like to point out that outside of this post, you should read up on options as best you can before wagering real money.
On this page we only talk about the facts, how it works and therefore only about the basics!
What did you think of this post? We have tried to address the topic as simply as possible. Did we succeed? What can we do better next time?
Let us know what you think in the comments section! And you might also be interested in the topic Lombard loan, then be sure to take a look at this article.
Thanks a lot for the article! I have found options exciting for quite some time. However, I'm wondering if options trading wouldn't change my taxation? Would my stock gains then be taxable?
Thank you so much for your feedback Katharina 🙂 .
You probably read this post: Save taxes with shares? This is how it works in Switzerland! - If not, please read it briefly... In addition: Depending on the volume of your options transactions, these could give rise to the suspicion that you are trading "acquisitively". To avoid this tax penalty, it is recommended that you only use options transactions (if at all) as a hedging strategy. If you still want to trade "at will", you should keep the volume small compared to your regular income etc. so as not to give the wrong impression. Of course, this is not a guarantee, and I am not a tax expert - this is simply the information I have 🙂