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Stock options: What are they and how do they work?

Updated on January 31, 2011

Basically, an option is a contract
future where buyer and seller
undertake to buy or sell
certain amount of shares at a price
preset. While the methodology is a
somewhat complex, probably worth it
internalized respect.
Go to a practical example. To begin
explain the operation of a
call option (CALL). Suppose
YPF is the price of 40$. Market
Securities an option to enable
YPF shares worth 40$
4 months maturity. The investor may
decide to purchase the shares at a price
40$ each or by paying only 3
or 4$ to have the right to buy them
40$ each.
What is the difference between buying the action
and have the right to buy?. If we decide
invest in stocks, we own the
same and we will be affected by everything
it happens, whether it rises to 40$ as
if it falls. In contrast, if we choose the option
40$, we will have 4 months to decide whether
actually paid the 40$ or not. Thus,
those four months the action can go up to 60
weights, but we and we reserve theright to pay by 40 which will win
20$ for every action we decide
buy, however if those 4 months
base stock at 20$, well we do not
we will use our right to purchase
40 and only lose 3 or 4 dollars that
we pay for having the right and not the 20
we have lost if we had bought
direct action.
Basically what we do is buy
right to buy shares at a fixed value. If
at some point the share price is
above that fixed price, surely
we make money, if lower,
Our greatest risk are the 3 or 4$
we pay for the right.
Operate in reverse options
sale. Those who wish can commit to
sell shares at 40$, so
pay those 3 or 4$ in advance. Thus,
if within the period of 4 months the action it
less than 40$, the holder of the option
may exercise its right to sell at 40 and
counterparty is required to pay in
change if the stock rose to 50, probably
decide to sell the shares on the market
for 50$ and do not deliver to 40 which
lost only 3 or 4 that have advanced by
the right to sell at 40. To be clear,
simple, which is traded as a right either
to buy or sell shares at a Price default.
This commitment requires the seller (
PITCHER) to comply and gives the option to
Buyer (OWNER) to decide what to do.
Who has the right to decide is who
payable by that law, who has
obligation to comply is who charges that
Once we understand the operation of
the options we see that our factor
principal is the time since the choices
have a validity period (eg 4 months)
such time the option expires, by
which is a short-term investment, with
a high rate of risk and obviously
very high.
The main game takes place in the options is
to try to multiply those 3 or 4$
are payable in advance. Those who have
purchased options base 40$,
benefit with an increase in the paper
over those 40$, since the right
for which they paid 3 or 4$, maybe
cost 6$ now. Thus we see as a
up to 4$ on paper represents 10
% improvement, but the same rise in
options represents 100%, since the
paper rose from 40 to 44, but the choice of 4 to 8
That is why the options have high
volatilities are high risk and involve high profits. We must be clear that
at expiration, the options disappear
which the possessor must decide whether
change the price per share paid
provided or simply do nothing
losing 4$ paid for
advance. Here is a description of a
Price of the shares of YPF = 40$
YPFC40 option price, 0DI = 4$
Meaning of the abbreviation: Species:? YPF
Type = Purchase option (call) = 40 fixed price
pesos, Due = December.
4 weight value is a preset
, but moves by supply and demand
is directly related to the time
remaining until maturity. A higher
longer time value, and as it approaches
maturity, the sum of the price
option (premium) plus the fixed cost base
(exercise price) tends to be equal to
trading price of the paper. Therefore,
while YPF cost 40$ per share,
fixed base 40 option cost 4$ missing
months to maturity, but will cost 0
reached maturity.
Why 4 months before and then it applies both
It is simple, what we buy to pay
4$ is the time and expectation, as
that time is running out and the expectation decreases, the investor interest for it
is lower and the price also, conversely,
when the expectation is higher, the price rises
even though the reduction in hours.
What is my benefit when operating in options?.
First, there is a need for a
large volume of money because
options are of little value. In second
ability to to multiply the amount is
much greater than doing so with actions
but obviously the risk is higher.
How I can win?.
The percentage of profit is unlimited, the
more up action in the duration
(e.. 4 months), the more you win. But obviously
if the action does not rise in those 4 months will suffer
loss of premium paid.
Why should pay 4 dollars for later
40 if you buy today I can buy at 40?.
Simple, if the quote of YPF
down, only to lose the 4 weight forward and
will not suffer any down because the paper.
"I can buy and sell options?.
Yes, that's basically what the
investor makes to keep its
position. The options are very dynamic and
are constantly changing prices
According to the movements of the papel.Por
both during a single day can be
buy and sell options as many times
good wishes and differences in only minutes.
"Can I operate in options?.
Anyone can do it, we should only have
absolute awareness of the cost benefits to which
we are exposed and have the advice
right to be informed
absolutely anything can happen
with them .-
Can you strategize with several
Yes, and in many cases, the strategies we
can cover on any
abrupt market movements are either
a safeguard against strong base, upload
strong or stable markets. The combination
between two or more options allows us to play
for or against the market move
and somewhat limit our risk.

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