Introduction to Options
Agenda • What is an option? – Call options – Put options
• Advantages of trading options • Placing an options trade on your SaxoTrader 2
What is an option? • An option gives you the right, but not the obligation to either buy (call option) or sell (put option) the underlying instrument at a certain price (strike price) on a specified future date (expiry date)
What is an option? • An option gives you the right, but not the obligation to either buy (call option) or sell (put option) the underlying instrument at a certain price (strike price) on a specified future date (expiry date) • For this right, the buyer of the option pays a premium upfront to the seller (or writer) of the option
Insurance scenario
• Option buyer Unlimited gain, Limited loss (premium)
• Option buyer Unlimited gain, Limited loss (premium) • Option seller Limited gain (premium), Unlimited loss
• Option buyer Unlimited gain, Limited loss (premium) • Option seller Limited gain (premium), Unlimited loss • Two main types of options: the Call and the Put
Call Options
The Call • The right to BUY the underlying instrument at a certain price on a specified future date
The Call • The right to BUY the underlying instrument at a certain price on a specified future date • Why? You want to capitalize on an increasing trend in the spot market (bullish). The trend could be either long-term or short-term
The Call • Example: You believe EURUSD will rise towards the 1.22 level in about a month’s time. The spot rate is currently 1.1720. You buy a EURUSD Call with a one month expiry and a strike of 1.1750. The price is 108 pips.
The Call • Example: You believe EURUSD will rise towards the 1.22 level in about a month’s time. The spot rate is currently 1.1720. You buy a EURUSD Call with a one month expiry and a strike of 1.1750. The price is 108 pips. • Upside: Unlimited, and calculated by: – Closing spot price – Strike price - premium = profit – Ex. 1.2000 - 1.1750 - 0.0108 = 142 pips
The Call • Example: You believe EURUSD will rise towards the 1.22 level in about a month’s time. The spot rate is currently 1.1720. You buy a EURUSD Call with a one month expiry and a strike of 1.1750. The price is 108 pips. • Upside: Unlimited, and calculated by: – Closing spot price – Strike price - premium = profit – Ex. 1.2000 - 1.1750 - 0.0108 = 142 pips • Downside: The premium (108 pips) which will be lost if the option is Out-of-The-Money (OTM) at expiry
Put Options
The Put • The right to SELL the underlying instrument at a certain price on a specified future date
The Put • The right to SELL the underlying instrument at a certain price on a specified future date • Why? You want to capitalize on a decreasing trend in the spot market (bearish). The trend could be either longterm or short-term
The Put • Example: You believe EURUSD will fall towards the 1.14 level in about a month’s time. The spot rate is currently 1.1720. You buy a EURUSD Put with a one month expiry and a strike of 1.1600. The price is 43 pips.
The Put • Example: You believe EURUSD will fall towards the 1.14 level in about a month’s time. The spot rate is currently 1.1720. You buy a EURUSD Put with a one month expiry and a strike of 1.1600. The price is 43 pips.
• Upside: Unlimited, and calculated by: – Strike price – closing spot price - premium = profit – Ex. 1.1600 - 1.1510 - 0.0043 = 47 pips
The Put • Example: You believe EURUSD will fall towards the 1.14 level in about a month’s time. The spot rate is currently 1.1720. You buy a EURUSD Put with a one month expiry and a strike of 1.1600. The price is 43 pips.
• Upside: Unlimited, and calculated by: – Strike price – closing spot price - premium = profit – Ex. 1.1600 - 1.1510 - 0.0043 = 47 pips • Downside: The premium (43 pips) which will be lost if the option is Out-of-The-Money (OTM) at expiry
In-The-Money At-The-Money Out-of-The-Money
Call Options (right to buy) In-the-money Strike price < Current spot price 95 < 100
At-the-money Strike price = Current spot price 100 = 100
Out-of-the-money Strike price > Current spot price 105 > 100
Call Options (right to buy) In-the-money Strike price < Current spot price 95 < 100
At-the-money Strike price = Current spot price 100 = 100
Out-of-the-money Strike price > Current spot price 105 > 100
Put Options (right to sell) In-the-money Strike price > Current spot price 105 > 100
At-the-money Strike price = Current spot price 100 = 100
Out-of-the-money Strike price < Current spot price 95 < 100
Advantages of trading options
â&#x20AC;˘ Limit your risk
â&#x20AC;˘ Limit your risk â&#x20AC;˘ Hedging opportunities
• Limit your risk • Hedging opportunities • Traded OTC (over-the-counter)
Placing an Options trade on your SaxoTrader 2
Placing a trade Currency Cross Type of Option Strike Price Value Date Expiry Date Amount of Trade Buying and selling quotes Cost of Premium
Expiry
To close your option prior to expiry
Expiry At Expiry (10am New York time): In-the-money Becomes spot position Out-of-the-money Removed from account To close your option prior to expiry
Summary 31-33 Streaming Options Pairs Buy or Sell, call or put 24 hour professional service Overnight to One year (RFQ) Personal Service for HNW
Please contact us anytime: E1RegionNorthAmerica@saxobank.com Toll Free from USA: 1 800 961 0169 Direct phone number: +45 3977 6390