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Options are derivatives based on the value of underlying securities such as shares. The building block of the options are calls and puts. Each comes with own benefits and risks, and they change depending on long or short position. An options contract offers you the opportunity to buy or sell the underlying asset, depending on the type of contract you hold. That means options enable you to benefit from both rising and falling markets.
In volatile markets Options become more useful for its leverage and hedging ability and potentially can generate income.
Options can be used to manage risk in the form of hedging a share portfolio and can lead to potentially increase the returns. Engaging options to speculate on the direction of the market, potentially can achieve significantly higher returns, however it involves significant risks. Not everyone is suitable for options trading, it depends on their propensity for risk and the level risk tolerance.
However, options are complex products, and you need to fully understand the risks before start trading options.
A Call option gives the right, without the obligation, to buy (long position) shares or index or other underlying asset at a fixed price (strike price) on or before a fixed date (expiry date).
Interested in purchasing a particular share but don’t want to invest the whole amount outright for whatever reason. So instead of purchasing that share, you could buy a call option which gives you the right to buy that shares on or before the expiration day at the strike price. In here without owning those shares, able to profit from the rise in share price.
Buying a call option is a bullish strategy because it can profit if the underlying share rises in value.
The seller (short position) of the call option is obligated to deliver or sell the shares or index or another underlying asset at the fixed price.
Selling a call option is a bearish strategy with the outlook of depreciating or least neutral on the underlying share and profiting from falling price for the share.
If the underlying share rise in price, selling a call option without owing the underlying share, potentially can lose substantial amount.
Selling a call option is a bearish strategy with the outlook of depreciating or least neutral on the underlying share and profiting from falling price for the share.
Put option gives the right, without the obligation to sell the underlying stock or index or another asset type, at a fixed price (strike price) on or before a fixed date (expiry date).
If you own shares and believe its price is going to fall. Then instead of selling the share, you could buy a put option that gives you the guaranteed sale price (strike price) for a limited time. So that if the share price falls within the contract period, you can sell the share at the strike price.
Buying a put option is a bearish strategy, it can be used to hedge or profit from falling price of the underlying share.
Interested in owning a particular share but like to purchase it at lower than the current market price, so instead of buying it now, selling puts can give you the opportunity to buy at a lower price if the underlying share price falls below the strike price while making a little bit of income premium.
Selling a put option is a bullish strategy, profiting from rise in the share price.
Warrants are very similar to Call options. The basic attributes of a warrant and call are the same.
Warrants are issued by a company, but Call options are issued by an exchange.
Warrants have few standardised features, but Call options are more standardised in some aspects, such as expiration periods and the number of shares per option contract
Warrants have longer maturity periods than call options. Warrants typically have one to two years and can also have excess of five years. Call options have little as weeks to year or two.
When warrant is exercised, the company is obligated to issue new stock which causes dilution. Call option does not cause dilution when it gets exercised because it’s a derivative instrument on an existing common share.