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What are options?

Options on stocks, futures or ETFs are derivative financial products, change their value disproportionately strongly compared to their underlying. Here it can be that a share z. B. loses 3% in value in one day, but an associated option 25%. This is what makes the enormous returns, but also the enormous risk of loss.

Options are the right (but not the obligation) to buy (call) or sell (put) a specific underlying (share, future, index, ETF, ...) on a specific date and at a specific price (strike). Important: there are two types of options, American style and European style. American style means that the options too in front the actual expiry date, this is not the case with European ones. With these, the option can only be exercised on the last trading day. However, options can (and are) traded before the expiration date to close positions, take profits or limit losses (more on this later). Options in the equity area always relate to 100 shares.

An example - the starting point

From my point of view, the principle of options is best illustrated by a specific example:

Apple Inc. (Ticker symbol: AAPL) listed at the time of this writing (Monday morning, 11/25/2019) at 261.78 USD, a month ago (25.10.2019) at 246.61 USD.

Who knows how things will go with Apple? The stock could continue to rise, move sideways, fall, be taken over, ... we want to look at the different scenarios from different traders' perspectives.

Put options

Marie bought 100 Apple shares years ago, is happy about the exceptionally good return, but is not sure whether Tim Cook is really a Steve Jobs too. She does not want to sell the 100 shares, but is unsure whether the latest iPhone 0815 can meet expectations in the Christmas business. She would like insurance for falling prices after the Christmas holidays and is buying an option that will allow her to buy her shares for $ 245 until January 17, 2020 to sell. This option costs them $ 345 and is known as the AAPL Jan17'20 245 PUT. Marie is that put longSo she bought it. It is more precise Long put.

"What? So much money for an option that is currently priced at $ 260? "

Remember: an option in the equity area always relates to 100 shares, i.e. it should all sell their shares for $ 245 in January 2020. Currently, your stock portfolio is worth 100 * 260 USD = 26,000 USD, so insurance costs you only 1.32% of your portfolio.

Call options

Max has understood the business, is an Apple disciple of the first days and is absolutely certain that Apple is the best, most valuable, greenest and generally coolest company on this side of the Atlantic. Whether Wozniak, Jobs or Cook - it doesn't matter, Apple will surely rise above 300 USD in January after the brilliant Christmas business with the iPhone 0815 (which also has cameras at the back down in 4k). He buys a call option for a strike price of USD 290 (why do these unbelievers actually have no options for values ​​over 300?), Which currently costs him around USD 115 (designation: AAPL Jan17'20 290 CALL). He also bought the option, so is long, more accurate Long call.

The opposite side

Where did Max and Marie buy the options from? Usually there is also a counterpart for every trading idea, so both of them need a seller. In options terminology, the sellers are shortSo, the seller for Marie's option is short put, who is the seller of Max's option short call.

So Marie's seller hopes that the Apple share will continue its course and continue to rise or move sideways, the main thing is Apple stays on January 17, 2020 above the strike price of $ 245.00 (245.01 would be a thrill, but still perfectly ok). The seller of a put option usually has a bullish, neutral or slightly (!) Negative market expectation. He is Short put.

Max ’salesman expects that there are now other big players in the smartphone business (keyword Samsung) and the series and films from AppleTV + are only going to knock him off his feet to a moderate extent. There is no way he believes Apple stock will surpass $ 290 in January. As a rule, it has a somewhat bearish, neutral or even slightly (!) Rising market expectation. He is Short call.

At this point, however, it should be said that we usually do not trade with a human counterpart, but with a so-called counterpart Market maker. He provides various option prices and has no expectations of the market, but earns his money through fees and so-called. Spreads (i.e. the difference between the bid and ask price).

The result

Now let's imagine it's January 18, 2020, the trade fairs have been read and Apple may have had a good Christmas business with its new iPhone 0815, but unfortunately the original Korean rice cooker seller Samsung had released the Galaxy Universe S2000 at the same time and capitalists also need it not two very expensive smartphones. The price of the Apple share is thus $ 285.73. What do the options look like now?

Marie is pleased about the increased prices of the Apple share. Your share portfolio has increased by another USD 2,500 and is now at USD 28,500. In principle, she would have her right to execute the shares for USD 245 by the expiration date, but of course this makes no economic sense at all. Why sell stocks for $ 245 through her put option when she could also sell the stocks in the market for $ 285? She spent money on the insurance, but more than made up for the premium with the rise in shares.

Max had the right nose, but had ignored the Korean competitor and overestimated the performance. His $ 115 option premium is gone. Those lousy unbelievers ...

Both the seller of the option Marie as well as the seller of the option Max may keep his premium (345 USD vs. 115 USD).


Options are a kind of “bet” (better actually: acceptance) in the future with different market participants. The sellers of an option take on a risk and receive a premium in return, the buyers of an option have different interests, including speculative intentions (Max) or a hedging request (Marie). The market maker brings these different interests together and provides prices according to supply and demand.

In my opinion, the term “bet” lags a bit, because you can't predict the future, but you can count on certain probabilities. In our example z. For example, the market maker does not have options for a strike price of USD 50 or USD 500 for January 2020, since it assumes, based on stochastic calculations, that Apple will not be traded at these prices. This does not mean that it could not happen anyway (tomorrow a nuclear war breaks out, Apple has been secretly owned by Chinese state television for a long time or every iPhone 0815 now has a quantum computer), but it is very unlikely and therefore no prices will be available outside of an expected fluctuation range Provided.

In this context, it is ultimately important that - in contrast to other financial products - we can take all four positions (long call, short call, long put, short put) - but more on this later on the strategy page.