Options

About Options – for beginners

1. About Options – simply

Modern age options started spreading on financial markets because more and more people recognized that the future is so uncertain that even the most aware investors could be caught out by unexpected and disappointing surprises. Fortunately, today a number of portfolios can be formed, for which the disciplined investor not only knows his investment is risky, but he knows in advance how much money he can lose if the future turns out against his expectations.
Instead of buying equities, a buying option can be purchased.  This option is traded on a predetermined strike price, which grants the opportunity to buy the equities at a future time. It is not mandatory to exploit the opportunity, so the buying option will only be called at expiry if the actual price of equity is above the initial trading price.
When somebody meets options for the first time, it might seem to them, that the opportunity of not calling down is the point of options.  Indeed, it is a very strong attribute, it is an opportunity for risk lowering. The next example shows this:

1.1. Example for purchasing a buying option (long call)

Let’s go back in time to December, 2007. Let’s say that an investor carefully reads the analyses, consults with his private banker and confidently purchases OTP shares for HUF 10 million, at HUF 8800 average price, because the target price is called often around HUF 15000 at the big London brokerhouses. For HUF 10M he could get 1136 pcs OTP shares. In 2008 December his portfolio of OTP shares at price HUF 2900 came to be worth HUF 3.294.400. A very thoroughly considered investment decision could cause a loss of more than 67%.  It may be that analysts already made a mistake in 2007, maybe it was the world that changed radically since.
In December, 2007 another investor read the same analyses and came to the same decision: there is seriously increasing profatibility in OTP stocks, perhaps a target price 15000 could be reached. This investor differs in one thing from the others. He knows that there is a serious profit potencial in stocks, but he also knows that we can read so many analyses, and however optimistic the market is feeling, the future remains inscrutable. Therefore he is looking for a kind of portfolio where it is previously clarified, what happens if the worst case scenario should occur. He purchases a call option for HUF 1.363.200 which allows him to buy 1136 OTP shares at 10,000 in December, 2007 (this option costs HUF 1200,  and he bought 1136 pcs it. With the rest of his cash, HUF 8.636.800, he purchases 1 year discount treasury bills. Obviously today we know that this investor would not use his call option in December 2008, and he does not buy OTP shares at 10000, because at that time the price of an OTP share is only HUF 2900. The call option has no value.
If analyses turned out to be correct and OTP shares are around the HUF 15000 target price, the second investor would also hit a good bargain, because he calls his option and purchases shares at HUF 10000, which can be sold at HUF 15000 immediately.  The first investor has a portfolio of stocks, the second investor only acquires stock if the OTP price is above HUF 10000. It is similar to poker in the respect that we only raise our bet when we have that all four aces in our hand.

1.2. Example for a buying option covered call

Like all traded products, options can not only be bought, but of obviuosly they can also be sold. Basically, it is a very risky position, but investors often take advantage of this opportunity, because in a number of cases they can be wothwhile.
An investor has 10000 OTP shares with HUF 4500 historical price. If the current price of the OTP shares is HUF 3000, the investor does not want to sell his securities.
The investor can get money if he sells 1 year call option for HUF 227 option premium for HUF 5000 trading price. The whole incoming option fee is 10.000 x 227 = 2.270.000 HUF which will be credited to our partners account the second day following the trade date.
After a year there could be two scenarios: OTP is below HUF 5000, the option runs out without any forther activity, and it is terminated. If OTP is above HUF 5000 the client sells the 10000 shares. The option premium remains the irrespective of the outcome of the option.

1.3. Trading with options

There are two kinds of forums where sellers can meet buyers. Market orders can be given for the standardized options of the most liquid basic products. You can see detailed explanation about exchange options in section 2.1. (options for experienced)
In case of less liquid basic products or options with special attributes Hungaria Equities option division records the unique price at the time the over the counter (OTC) contract is made. OTC options can be found in section 2.2 (options for the experienced)

Simply about complicated matters – personal consultancy

We stress that option positions would be proposed to our partners as balanced portfolio elements. Please allow us to show you our wide variety of option products and the advantages of options trading in the course of a personal meeting.

Please contact us!

About Options – for the experienced

2.1 Options traded on Exchanges – liquidity in the centre

For the most liquid basic products (underlying) option contracts can be traded on stock exchanges. In 2009 January for Google shares the following expiries traded the most : JAN2009, FEB2009, MAR2009,  JAN2010 and JAN2011. For all expiries more than 30 different strike prices are offered and for every strike price call and put options can be traded. So as a cautious estimate there are almost 400 different option contracts active. Additionally, this is only an option market of one blue chip share. We are helping our partners to navigate themselves on the options market and it not to be a confusing labirynth for them, but a real advantage.

The big advantage of the exchange traded options is the constant presence of narrow bilaterial price that is: liquidity. So for example a sold call option could be repurchased cheaper on the same day if the price of the underlying stock decreased and some of the cent spread is not barring profit relisation.

Our option traders are able to give orders on behalf of the following exchanges:

USA    CBOE Chicago Board Option Exchange  - The first and most active liquid option exchange. The 85-90 percentage of USA options are traded here.
AMEX American Stock Exchange
BOX Boston Stock Exchange
CBOT Chicago Board of Trade
CME Chicago Mercantil Exchange
ISE Options International Stock Exchange
PHLX Philadelphia Stock Exchange
PSE Pacific Stock Exchange
Canada    ME Montreal Exchange
United Kingdom    LIFFE London International Financial Futures and Options Exchange
Switzerland    SOFFE Swiss Options and Financial Futures Exchange
Germany    DTB Deutsche Terminbörse
FWB Frankfurt Stock Exchange
SWB Stuttgart Stock Exchange
France       MONEP Marché des Options Négociables de Paris
Japan        OSE
Australia    ASX Australia Stock Exchange
SNFE Sydney Futures Exchange
Mexico      MEXDER Mexican Derivatives Exchange  -  Currently we can trade options only for Mexico Bolsa Index (IPC) futuresi.
Hungary    BÉT Budapesti Értéktőzsde  -  Because of the exchange illiquidity there are only OTC exchange through  contracts are possible. Domestic type options can be found at OTC options..