Options

Derivatives

Options can be lumped in with other derivatives such as futures, warrants and contracts for difference (CFDs). A derivative simply means that the price is “derived” from some underlying instrument, either a share, for example Rio Tinto, a commodity such as gold, or a financial instrument like the 90-day bank bill. Derivatives, such as options,…

Greeks

Greeks assist trades to estimate their risk when trading options. Understanding the Greeks gives traders an idea of the expected behaviour of an option. For example, – How will the value of the option change as the stock price changes? (Delta) – What is the probability of the option expiring in-the-money/out-of-the-money? (Delta) – What effect…

Call option

The buyer of a call option wants the price of the underlying instrument (such as a share) to increase in the future. The seller of a call option is happy to give up the winnings from a price rise in return for the premium, which is paid immediately. The seller still has the opportunity to…

Put option

Let’s say that you currently own 1,000 Telstra shares, which are trading at $4. However due to recent share price volatility, you decide to take out an insurance policy, or buy a put option, against a share price fall.  You buy 1 Telstra September $4 put option, for 50 cents, for a total cost of…

Options

Options are often thrown into the too-hard basket by the uninitiated. However, with a little patience, you can nut out the basics pretty quickly. An option is a financial contract between two parties, the buyer and the seller. The buyer is referred to as the taker, owner or holder of the option, and the seller…