About how options trading lever your returns by increasing your yield percentages.
Yet again, we are going to describe another financial instrument of variable revenue of slightly habitual use on the Stock market. Perhaps on markets like NYSE, Bovespa turn out to be a less sophisticated topic but at the time of evaluating risk and figure out the real value of these structured instruments, the average investor of this country it decides not to consume this product for his high volatile nature and low liquidity that this market has. Also it needs from a financial mature knowledge.
There are two types
Options Call (buy)
Options Put (sell)
Whereas the first ones grant to the holder (buyer) the right to acquire actions at a certain price or price of exercise (strike) from the moment of his buy until a certain date, date of expiration of the right of buy. The Put’s grants to the holder the right to sell a certain strike, preserving the owner the possibility of exercising it in the same time period earlier mentioned.
In order to execute an options call; we need to take three decisions
1.On what stock to buy the option
2.To what date of expiration (date of exercise)
3.On what price of exercise
We buy of an options trading call on stocks of a company that quotes on the stock market named COMPANY,
The advisable thing is to go in search of prices of strike near to the current quotation of the stock, if the Company stocks quotes to the current date at $1,53 US dollars we might be buying options on a strike of $ 1,44.
The cost of buying the options call on market might be quoting in $ 0,03 which indicates that a lot of 100 stocks would have a cost of $3.00. We can choose one with due date November 20. Then, the buy would be:
COMPANY: call, 1,44 => strike = $ 0,30
And there become detached the first reasoning to bear in mind.
Entire cost of the operation the end (expiration)
Strike: $ 1,44 + option trading call of $ 0,03 = $ 1,47
Stock price on open market = $1.57
What value would we take in this operation? The result would be a positive of US $ 0,06 per stock. Logically this simple operation of arbitration is not lasting on the market because it would do that investors attracted by this profit will enter making to raise the cost of the options trading call. Although obviating for a moment this analysis, the buyer making use of his rights to execute this option on November 20 would be getting the stocks for a value of $ 1,47 when on the open market, taking ceteris paribus, his price might be $ 1,53.
Which would be the intrinsic value of the Call? $ 1,53 minus $ 1,44 = $ 0.09 which would be a minimal value of reference.
This value should be, a priori, of $ 0,09 but with this assumption we are falling in the wrong hypothesis of which the price of the stock would remain invariable, without possibilities of rise for example. This pushes us to explain the behavior of two investors, of whom one possesses the stock ‘A’ and other the call ‘B’.
The first one ‘A’ had a cost of buy $ 1,53 and the second one ‘B’ of $ 0,09. If on t November 20 the price of the action raises 10 %, of $ 1,53 to $ 1,68. The first investor sells the action at this last price and the second one executes his right of buy: both drawers of risk came to the same profit: $ 0,15.
Investor “A”: $ 1,68 minus $ 1,53 = $ 0,15
Investor “B”: $ 1,68 minus $ 1,44 minus $ 0,09 = $ 0,15
Of this we can clearly see that investor ‘B’ invested way less capital that ‘A’ where the last one also bought an asset of risk that it produced much less, and his opportunity cost in placing the money between these two products might have been an opportunist in another laying of short term. The same assumption is also a copy to the fall of the stock and the result is identical, Investor ‘B’ loses only the value of the call, which in this case is of $ 0,03 whereas the holder of the action might see his value even more diminished in the stock.
This assure us that the price of the call will be bigger than its intrinsic value and the difference between the entire value of the premium and the intrinsic value will be the VT (value time) that is the reference just that measures the value of the money for the mere temporary course.
Of course the financial world is in it continues search of the exact value of time and what forces move it, modifying the value of the options trading calls. On slightly liquid markets these calculations, although they are calculated, the price often does not reflex the value of the option on the market to a true date.
Closing the example, in percentages of yield, whereas the investor ‘A’ obtained only 10 % the holder of the call, investor ‘B’ gained 67 % => margin of the operation ($ 0,15 minus $ 0,09) / $ 0,15.-
