Option (option) - binary and classical
What is an option?
Option (option, Latin optio - choice, desire, discretion) is a standardized contract, which refers to the so-called "option". derivatives or derivative financial instruments, whereby the seller gives the buyer the right, but not the obligation, to buy a specified asset within a specified time at a specified price. The seller of the option is obliged to make a reciprocal opposite transaction in the asset in accordance with the terms of the option sold.
What types of options are there?
Three types of options are distinguished:
- option call (to buy) - an option that gives the right to buy an asset at a fixed price;
- put option (put) - an option that gives the right to sell an asset at a fixed price;
- double option (double-sided).
Depending on the underlying asset and the market of circulation, options can be exchange-traded or unexchange-traded:
- commodity;
- currency options;
- percentages;
- index options, stock options.
Another important characteristic of options is their style. The style can be American, European and Asian.
- American style options - an option contract is exercisable by the holder for the duration of the holding period from the date of purchase.
- European style options - an option contract can only be exercised after the expiration of the option's life.
- Asian style options- the option is exercised at the weighted average price for the entire life of the option over the entire time period from the time of purchase.
In this case, the geographical reference of the option does not matter, for example, you can buy an American option on the European exchange.
What is the price of the option?
The price determined by the option is called the strike. In this case, literally any financial instrument can be used as an asset: futures, stocks, currencies, etc.
An option cannot be exercised indefinitely because it has an expiration date, i.e. a withdrawal date. At the expiration date, the option is either exercised under the existing terms or terminated.
Since an option is essentially a service in the financial market, it must be paid for in a certain way. The payment for an option is called the option premium and depends on both the terms of the agreement and the prevailing market situation.
The larger the gap between the implied strike and the actual price in the market, the larger the option premium will be.
Accordingly, the value of an option can change over time. It is the change in the value of an option that draws attention to it, as speculative trades with it can bring tangible benefits.
How does an option differ from a futures?
So are options, futures are one of the varieties of exchange contracts. The meaning of a futures contract is that it can also be used to make trade transactions with certain assets. Moreover, none of the parties to a futures agreement makes any additional payments to each other, except for the value of the assets being traded.
However, there is a crucial difference between futures and options. This difference relates to the obligations of the counterparties regarding the fulfillment of the concluded agreement. While a futures contract implies mandatory fulfillment, an option holder is not bound by such obligations.
Depending on his interest in the transaction, the option holder has the right both to make it on the terms specified in the contract and to refuse such action if it does not seem favorable to him under the circumstances.
It is not always profitable to use the option of buying option contracts of different types on transactions with the same asset, because in this case the trader will be obliged to pay a commission on both transactions. A futures contract, on the other hand, involves charging a commission only once.
What are binary options?
Among all the variety of types of option contracts, a special place is occupied by binary options, which are extremely convenient for expanding the portfolio of one's assets.
Their peculiarity is trading options with only two options for the outcome of the transaction: either losing or winning. It is precisely because of the presence of only two variants of deals that binary options got their name.
To profit from binary options, a trader is most often only required to predict the general direction of the market. Qualitative and quantitative factors are not taken into account.
Read more about binary options
Where can I buy options?
Options trading is most widespread in the United States, with the bulk of options trading taking place on U.S. exchanges:
- Chicago Mercantile Exchange (CME)
- American Stock Exchange (AMEX)
- New York Stock Exchange (New York Stock Exchange)
The main venue for options trading in Europe is the London International Financial Futures and Options Exchange (LIFFE).
In Russia, the FORTS section of the RTS exchange provides an opportunity to trade options.