Do you know why it is essential to understand the different types of options?
Because understanding them will help you make the right decisions about the investments you make.
There are many types of options contracts such as call and put options, futures contracts, forward contracts etc. Saxo capital markets offer the options that we’ll discuss.
Types of stock options
A call option contract is an agreement between two parties, where one party will have the right to purchase shares from another party at a specific price (also known as the strike price) on or before a given date.
If you had bought $1,000 worth of gold call contracts for HK$32 per ounce on January 1 of 2010, it means that if the gold price increased by more than 10% within this year, you can sell your call contract at HK$36 each or let it expire for nothing.
A put option contract is just the opposite of a call option; it gives you the right to sell 100 units of a specified security at a specific price on or before a given date.
Futures contracts are exchange-approved agreements to buy or sell a specified asset at a specific price on a future date. It is different from stock options, which give you the right to buy or sell an asset for an immediate price. Still, a future contract will force you to complete your agreement within its delivery period unless otherwise agreed by both parties.
A forward contract is an agreement to buy or sell goods at a pre-agreed price on a future date between two parties. It allows investors to make deals without incurring market risk because you are entering into an agreement with another party rather than transacting directly with the rest of the market.
Forward contracts are not commonly used in the stock market but are mainly used by those who trade commodities like oil and metals. A forward contract is also called “Forwards” or “Futures Contracts”.
Fixed Price Contracts
Fixed price contracts allow investors to enter into a contract with another party to buy or sell an asset for a fixed price within the duration of the contract. It is different from forwarding contracts because both parties involved will have to complete their agreement by taking or delivering delivery even though market conditions may change significantly.
If, for example, you bought 100 units of ABC at $10 today, and your counterparty also bought 100 units of ABC at the same price, then you cannot terminate this contract under any circumstances; instead, we can say that this is a firm commitment.
If you decide to buy ten more units of ABC next month without having first sold some units under this contract, then there is no impact on the initial trade as long as your counterparty agrees.
Exchange options are contracts that give their holders the right to buy (call option) or sell (put option) a specific quantity of shares committed in the underlying stock at a predetermined price within a given time frame.
They are similar to future options but not the same as they have several different features which you should know before entering into any commitment with your counterparty.
For example, if you bought ten CNX Nifty Index Future units at Rs9000 per unit for a middle term investment, then Stock Option would be a good choice for you.
You can take the stock option instead of buying 100 units of stocks to gain from the appreciation and depreciation process involved when the market fluctuates.
IPO stands for initial public offering; it is an integral part of capitalism where first time buyers or existing shareholders offer their stocks for sale to the public so that everyone can gain from stock price appreciation.
Public investors or shareholders prioritise the current owners of stocks, allowing new shareholders to buy stocks at lower prices than before for future gains.