WTF - OPTIONS

 

An option is a promise.  A promise that is made via a contract and upheld by the law...and usually some security, like company shares.

I might give [sell] you the option to buy my shares at a future date and promise that if you do decide to buy them, I will sell them to you: at the price and under the conditions we agreed.

That was easy!

Options are bought and sold electronically, and the contract is also virtual, that is electronic; somewhere in cyber space.

You can buy shares on the Australian Stock Exchange (ASX)… also known as the stock market.  You can also buy an "option" from someone else, who already owns shares, to buy their shares later on; if you choose to.  For example, if the share price goes up and you have an option contract to buy them at a cheaper price then, you would most likely buy the shares at the cheaper price and then sell them back to the market, at the current higher price, and make a profit.

Also, if you own shares, then you can sell an option to someone else.  You get paid for selling the option now and always keep this “Premium”.  The “Buyer” might then buy your shares from you later on, if the price goes up.   You're ok with this, in fact you are delighted with this because you are happy to sell the shares at the price you agreed in the contract and because the money you get for selling the option contract, which you have already been paid, may well be 2% to 3% of the value of the shares you bought in the first place; and the option contract period may only be a month!  2% to 3% return in a month is not bad.  First caution but; you are not likely to sell an option contract on the same shares consistently every month, however, you may regularly sell (write) call options over shares you own, or buy, (covered calls).

covered call option is a financial market transaction, enforced by a contract, in which the seller of the call option owns shares or other securities, covering the value of the contract.  If you buy the shares at the same time as you sell the call option then the strategy is often called a "buy-write" strategy.

Owning the underlying shares is said to provide the "cover" as the shares can be delivered to the buyer of the call option if the buyer decides to 'exercise' the contract.

Writing a call option generates income from the “Premium” paid by the call option buyer.

 

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