Put option - a new way to make money

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

People who have free money tend to invest it profitably. In this regard, the Western financial markets are far ahead of the domestic ones. In our country, for more than 70 years, interesting tools for making a profit, simply speaking, were absent. European, American, Asian markets by 70-80s. The 20th century has already somewhat exhausted the variety of games in the securities segment, which led to the emergence of derivatives - derivatives.

Today, derivative securities, which include put and call options, are defined as securities for the price of something (commodities, securities, indices, interest rates, etc.). Or as non-documentary rights that appear to the holder in connection with a change in the price of an asset underlying the derivative.

These instruments in the late 90s of the 20th century so “inflated” the stock markets in various countries that this led to economic shocks, stock market crashes and the instability of the banking system in 1997 in the Asian financial market.

Let's take a closer look at what a put and call option is. In the general case, an option is a contract that gives the right (not being mandatory) to buy or sell at a certain time the asset that underlies the contract. For the acquisition of such a right, a premium (i) must be paid, which is a small part of the total cost. The price of the future purchase (sale) (p) is set in the contract and is not subject to change.

Contacts of this type are divided into put and call options (from the English “put” and “call”). The first option gives the right to sell the asset, and the second option gives the right to buy. If the price of the asset at the time of the execution of the contract does not suit the holders, then the contract is not executed, because, we emphasize, the option confirms only the right, not the obligation. Thanks to such instruments, investors can benefit from changes in the prices of commodities, stocks, etc., without actually owning them, which is why derivatives have become so widespread.

A put (call) option can be American (executed at any time before the end of the contract) or European (executed only on the date of contract expiration). An option differs from another derivative instrument, a futures, in that if the contract is fulfilled, the underlying asset is necessarily delivered.

The potential profit of those who buy a put option is calculated as the price specified in the contract (p), minus the price of the asset in the market on the date of exercise (h) and the premium (i). Positive resulttransactions is possible only if h < p. With the reverse ratio (p<h), the holder suffers a loss equal to the premium (i).

For example, you buy a put option on shares with an exercise price of 60 rubles. in 3 months. Plus, pay a premium, say, 5 rubles. It is assumed that prices by then will drop to 50 rubles. At the time of the contract execution, you buy shares at this price, sell them under an option and receive a profit=70 - 60 - 5=5 rubles per share.

Summarizing, we can say that an option is indeed a tool that allows you to make a profit with minimal losses in the form of a premium.