There is a lot of trading in options on the stock exchange. This is the right to buy or sell a certain number of shares at a certain price. The risks associated with options trading are high, but a lot of money can also be made from it. That is why it is a popular way of investing. Some people use options to hedge the risk of investments. Read all about how buying and selling options works. A common form of investing is investing in options. You are not actually investing in shares, but you are investing in the right to buy or sell shares in the future. You are, as it were, speculating on future stock prices. The right to buy shares is known among investors as the so-called call option, the right to sell the shares is known as the put option. Both forms of investing are very risky, but this also means that a large return can easily be achieved, much more than with regular investing. When you buy an option, a price is agreed in advance at which you can sell or buy the underlying shares. This is the so-called exercise price. It will also be agreed until when you have the right to sell the shares. You pay a certain amount for this right, the so-called premium. This prime minister depends on the exercise price and the term. Other factors that influence the price of the premium are the interest rate and the volatility of the share in question. In the Netherlands, trading in shares takes place via the stock exchange. An option always concerns 100 shares and expires by default on the third Friday of the month.
How does buying options work?
If you trade via the stock exchange, you will have to deal with complicated abbreviations. An example of this is BAM C Dec 15 5.00 This code means the following: the call option gives you the right to buy 100 shares of the BAM Group for 5.00 euros until the third Friday of December 2015. There is often an amount behind the wording. This is the premium you pay to give yourself the right to buy the shares. So, for example, you pay 0.15 for the right to buy 100 BAM shares. The share price must certainly be at 5.15 euros by then if you want to make a profit. If the rate is lower than 5.00 euros, the right expires automatically. Moreover, it makes little sense, because it is better to simply buy the share directly on the stock exchange.
Risks of buying and selling options
Options offer many investors certainty that they will not suddenly lose all their money if the price falls. It’s a kind of insurance. What makes it attractive is that options can in turn also be traded. The value of the options rises and falls with the share price. If a share increases in value, the price of the so-called call option decreases, because the chance increases that people can buy the share directly from the stock exchange. Call options are given an intrinsic value based on expectations if the share is higher than the strike price. Put options acquire an intrinsic value if the share price is above the strike price. Three terms are used to represent the relationship between the price and intrinsic value. The first is: In-the-Money. This means that with the call option the share price is above the exercise price. At At-theMoney the price is equal to the exercise price. With Out-of-the-Money, the option has no intrinsic value. The share price is then far above the exercise price.
What to consider when buying options
When buying shares, a number of things must be taken into account. Firstly with the term. The longer this term, the greater the chance that at some point the share price will be above the point where you will make a profit. You can then sell the share for a profit. You should also pay attention to what the strike price is and whether this makes it worth it. If you think this price is too high, it is better not to do it. One last thing to watch out for is stock volatility. This is about the volatility of the price. If a share has a lot of price movement, there is a greater chance that the share will rise above the strike price at some point and the chance of a higher return increases.