options exchanges
Try it on an everyday example understand, so what does the options exchanges.
Suppose we want to buy a car, the price of which now amounts to $100 000. The price suits us, and we want to «fix»that is to make so that it has not changed. We go to the owner of the car and sign the agreement, according to which he will hold for us a car for three months. During this time, regardless of how the price will change on these machines on the market, we will have the right to buy a car at a predetermined price. That's just such a contract and call option contract, or just an option.
A reasonable question arises: what kind of interest in this contract for the owner of the car? The seller is willing to go to the described conditions in the case, if he will get some compensation (bonus), as a rule, a small percentage of the transaction value. For example, 2%. Thus, for the right to buy a car not more than $100,000 in the next three months, we now must pay the owner $2000.
What are the options for the further development of events?
The first option: the cost of the machine is up to $120 000. We can buy it for $100 000, as previously agreed. It turns out that our paper profit on the results of this transaction amounted to $18 000. Turn postal profit in real we can, for example, selling our contract to another buyer and ordered him of the prize in the amount of slightly less than $20 000. Thus, he buys the right to buy the car at a price slightly below the market, and to save, and we receive the difference between the amount paid US a premium and paid US the prize.
The second option: the cost of the machine fell to $90 000. As an option contract speaks only about the right to buy (or sell), we don't have to celebrate it. We just refuse to, but the lose paid a premium of $2000. Whatever happens, the seller of a car will receive the prize. And in case, if we have refused the transaction, the term of the contract expires, and the owner will be able to put the car on sale again.
In our example, we consider the transaction on purchase/sale of the car, although the object of the transaction can be anything.
The main pros of the options exchanges
There are three main benefits of the options exchanges.
Firstly, the options you can use to gain a fixed income. When we sell options, we get the prize. About insurance of risks in the sale of options we'll talk later.
Secondly, options can be used for the insurance of their investments. In fact, it's the original reason for the formation of contracts of this type.
Thirdly, options belong to the class of derivative instruments, which gives the opportunity to engage in the analysis of the prices is not only and not so much of the underlying asset (shares, car, food, etc.), but analysis of the changes derived from these assets. In the case of the options the first derivative is the volatility of the prediction of the changes which on the procedure easier forecasting the prices of the underlying assets. In other words, there is no need to guess, where exactly and in what time will the price of the selected us asset. We will be able to make a profit when the market is rising, falling, or in General is in place.
An important consequence of the above-mentioned properties of the options is that the share-trading significantly - (a) increases the potential ratio of profit/risk; (b) reduces the requirements to the quality of the forecasts and, in the event trade is not «naked options», and developed different combined strategy.
