Bringing the investing public financing options: The first step, the purchase of a call. Covered Release
The aim of this paper is to give the investor the world of financial options in the area of \u200b\u200bthe Stock Exchange of Buenos Aires. What are the options? What is the purpose? How can I purchase? How I can win or lose? Are they too risky? And try to explain other issues along the following paragraphs.
What is an option?
As its name suggests is an option-right of the buyer to purchase stock at a specified price or exercise price, and this right may be exercised from the time of purchase until a certain date. The most important aspect of this definition is to remember that this product (option) gives us the right to buy other stocks.
How do you get or buy? Suppose
we decided to buy a call option or call (in English) on shares of Pampa Holding. To continue, we must define the strike price and expiration date. Remember we said in the definition, one option is a right to acquire shares at a specified price and time limit.
To choose the exercise price or strike recommend starting by price listed near the action, since those options are often the most frequent operations or liquidity. For example, PAMP is trading at $ 1.60 per share, choose from the available bases close to that value (the bases are determined, one should choose between the available and you can choose any). To our example is 1.54 and the choice is PAMC1.54OC where
PAM: option on the shares of Pampa Holding
C: type of choice for our case C Purchase. 1.54
: exercise price is the price at which we are entitled to buy the stock.
OC: month of expiry of the option, August.
As the expiration or time limit, in our market maturities occur the third Friday of even months. For our example, October is the month closest pair and the expiration date is 17 October. How much does
buy a call option? Do you regard the price of the option with the share price?
In our example, where we consider a quote from Pampa holding a $ 1.60 per share and bought the option exercise price of $ 1.54 per share, to buy this right, we could take at any time until the third Friday in October. Intuitively, if we can buy stocks because we have the $ 1.54 option, and the market costs $ 1.60 per share is expected or intuitive than the cost of the option or premium, is at least $ 0.06. Let's see why.
Suppose that the right (or premium) you can buy at $ 0.02 per share, and immediately exercised. Then buy the stock at the strike price $ 1.54 per share and the hypothetical investment in the premium is 0.02 over 1.54 for the purchase of shares.
The total is $ 1.56 per share. But there is the possibility of selling shares on the market that I have in my possession at 1.60 (market price or trading of course) and make a difference of $ 0.04 per share excluding commissions immediately. The minimum value of $ 0.06 will be called intrinsic value.
Now we must answer a second question on the premium. Should the premium cost more than the minimum?
The intuitive answer would be that the price of the option-premium should be $ 0.06 for no difference with the quoted price as explained above, but with this course we are leaving the possibility-probability that the rise in price action in the future.
Here we analyze one example to understand why the premium should have a value greater than the intrinsic.
Suppose two people, one who has the other $ 1.60 and $ 0.06, where the first action and buy a second purchase option to the intrinsic value. At the date of maturity of the option, we assume an increased share of $ 0.10, so Pampa Holding is trading at $ 1.70 per share. The first person to sell the stock at that value and the second runs its right to buy at $ 1.54 per share and sells it immediately to $ 1.70 per share.
So the first person earned $ 0.10 cents and the second won the deference between the sale and purchase payment less the premium above (1.70-1.54-0.06) = 0.10 $.
In conclusion, the two earned the same money but the second was to involve far less capital. Under this assumption would have been more profitable for the first person to do the same as the second and put the surplus money in the bank and collect interest. The same analysis can be performed to a drop in share price and the benefits to the buyer of the option will be similar with an additional advantage which is that if the action down $ 0.06 or more, the option holder only lost $ 0.06 to the maturity date. Then we can assert that the price of the premium will be higher than its intrinsic value and the difference between the total value of the premium, or the market price and intrinsic value is called time value.
much time should be the value, what variables involved, and other issues that deserve deeper, are not matters discussed in this article. As we will operate with relatively liquid options, the final price of the option is going to determine the market. For those who want to can progress further with concepts such as Black & Scholes valuation, volatility of the underlying asset, time value curve as the exercise price, etc..
Intuition, a way to understand the risk of the options.
Returning to our assumptions, let's add two more data. The date on which we perform the operation, for example August 29, 2008 and the premium paid for the option is $ 0.13 -. Suppose for a moment after the stock rises to $ 1.60 per share to $ 1.65 per share, equivalent to a percentage increase of around 3%. How much should vary intuitively option price? Intuitively, the increase should be closer to $ 0.05 which is the variation that suffered the asset, where the new price of the premium should be close to $ 0.18 / item. Calculating the return on my investment,
(Final Price - Initial Price) / Initial Price = (0.18-0.13) / 0.13 = 38%
So while in the possession of my performance shares is 3%, with the option to get much higher yields and the same reasoning applies to losses in the stock price with the loss. The real change in the premium price of an instant after the increase will be close to the intuitive values \u200b\u200bfor our example, but not necessarily be those values, deeper technical reasons and because the options market has its own supply and demand they will be the determinants of the final price.
Below is a simulation of option prices for different variations in the share price to an estimation method prices of widely used options in the market and recalling again that the values \u200b\u200bshown below are only theoretical and the real market is the one who set the options prices to changes in share price.
http://www.leiod.com.ar/Lanzamiento/OperacionEjemploPAMP2.xls
The passage of time, a blow to the buyer of options.
then show the same valuation method how detrimental over time to those who bought a financial or stock option. It is a fact to bear in mind because if the share price remains constant our cousin have decreased in value as we approach to date.
For our example, the premium of $ 0.13 / item becomes $ 0,094 / option 30 days after reaching its intrinsic value of $ 0.06 / option to the expiration date if the stock price does not change and remains with a quote of $ 1.60 per share.
http://www.leiod.com.ar/Lanzamiento/OperacionEjemploPAMP2.xls
Conclusions
Buy a call option to our portfolio gives us opportunities to have greater absolute relative returns over the actions, or gain or lose more in proportion compared to the holding of the shares. This concept is called leverage or leverage in English. On the other hand with the passage of time if everything remains constant, we must remember that our option is worth less and less.
The author is the creator of www.leiod.com.ar, a place to enhance options trading in the stock area of \u200b\u200bBuenos Aires. Released
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