• What are the trades of buying option and selling option?
• What steps should we go through to make option transactions?
• What is the difference between futures and options?

Options trading or option contracts, which are considered as one of the derivative instruments, are a type of securities. These contracts allow the buyer or seller to buy or sell assets at a predetermined price on a specified date. Option trading offers a variety of options to traders. Although these types of contracts can be profitable, they also carry a lot of risk.

What are option transactions?

Option transactions or option contracts are securities by which the seller undertakes to trade a specified number of assets subject to the contract at the price specified in the contract, upon the buyer’s request. The buyer of bonds can apply the contract at a certain time in the future, according to the agreements made. An option is a contract that is linked to another underlying asset such as stocks or other securities.

The option seller receives a certain amount from the buyer of these bonds for this obligation. In order to prevent the bond seller from refusing to fulfill the contract, he undertakes to place an amount as a guarantee with the stock broker or clearing house and adjust it according to the changes in the bond price. It should be noted that the buyer and the seller can transfer their authority or obligation to a third party for a certain amount.

When does the history of the option contract go back?

The history of option trading goes back to ancient Greece and the first person who used this type of trading was the Greek philosopher Thales. The Chicago Stock Exchange, which is considered one of the most important stock exchanges in the world, was established in 1973.

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Types of option transactions

Option transactions or option contracts can be in the form of buying options or selling options:

Purchase option contract

A call option contract gives the buyer the right to buy a certain amount of an asset in the future, at a certain time and at a certain price from the option seller.

Sales option contract

A put option contract gives the buyer the right to sell a certain amount of an asset in the future, at a certain time and at a certain price to the seller of the option.

Types of option positions

Types of option trading positions include:

Long Call Option purchase position 

Long Put Option buy position 

Short Call Option selling position 

Short Put Option selling position 

Buyers of buy or sell option positions can profit to an unspecified amount, but their losses are limited to the amount they paid for buying the option.

Sellers of short put positions are limited in profit and their maximum profit is the amount they have earned. Sellers losses are unlimited.

What is the mechanism of option trading?

Based on the option contract, two parties agree to make a transaction in the future. In this transaction, the buyer of the option acquires the right to buy or sell the asset specified in the contract at a specified time at the price specified in the contract, in exchange for paying a certain amount. The seller of the option, in exchange for granting this right to the buyer, is ready to sell the agreed asset by receiving a certain amount at the time of signing the contract. The contract holder (buyer) is free to exercise his right and has no obligations and obligations, and if he withdraws from the contract, he will lose the amount he paid in exchange for this right. It should be noted that the seller is obliged to execute the contract if the buyer wishes.

An option is a contract that depends on the traded asset. For this reason, this contract is a type of derivative bond. In order to carry out option transactions, the first step is to register and authenticate in the Sejam system. Then, register in one of the stock brokers, get authenticated and get a stock code. Buying and selling of options contracts is done like other transactions online or in person at a brokerage. It should be noted that, unlike other shares, the scope of the call option transactions has not fluctuated, and now the call option for each share includes 10,000 shares on the date it is applied.

The meaning  of derivatives 

As we said, options are classified as derivatives. Being “derivative” means that its price is dependent on or derived from the price of something else. The option is derived from financial securities, that is, its value depends on the value of other assets. There are different types of securities that are traded under the title of derivatives; For example: futures contracts, advances and swaps.

stock market option symbol

The symbol for buying options in the stock market is the letter “z” and the symbol for selling options in the stock market is the letter “i”, which is added to the beginning of the symbol of the companies that have the possibility of purchasing options. To view the option symbols, select the options option from the “Markets” menu on the Rahvard site.

From January 2016, the purchase option was considered only for Mobarakeh Steel Company of Isfahan, Iran Khodro and Iran Copper Industry Company. But now it is possible to buy options of more companies. On the symbol page with options, next to the name of the symbol, the price of the exercise and the date of exercise are also indicated.

Advantages of option trading

• Suitable for reducing the risk of transactions in the market
• Greater flexibility in speculative trading
• Different combinations of trading strategies with specific R/R ratio
• Ability to perform multiple transactions at the same time
• Using it to reduce transaction entry fees

Disadvantages of option trading

• The difficulty of calculating the reward mechanism of the option contract
• High risk especially for option contract sellers
• Complicated trading system and strategy compared to other methods
•  Less liquidity and as a result, attracting less investors
•  The fluctuation of the bonus rate depends on the stock price on the expiration date of the contract

The difference between option contracts and futures contracts

In the future contract, the seller undertakes to sell a certain amount of the commodity in the future at the price they set now, and in return, the other party to the contract undertakes to buy that commodity with those specifications. Options and futures contracts are both derivative contracts. Although these two contracts have many similarities, they also have differences, which are:

Unlike option transactions, if the expiration date comes in futures contracts, the contract will be executed. This means that the holders of futures contracts are obliged to exchange the desired asset (or its cash equivalent). But option contracts or option transactions are executed only at the discretion of the contract holder. If the holder of the option contract executes it, the seller is obliged to trade the desired asset.

How to get out of the option contract?

The holder of the transaction option can withdraw from the contract in one of the following three ways:

Close his position:  because the buyer of the option contract has already bought a contract, he can close his open position and exit the market by selling the same contract to another person.

Use his right:  the buyer of the option contract can use his right to sell or buy goods and execute the contract.

Do not use his right:  If the option buyer does not benefit from using the option, he can not use his right on the due date. Therefore, the contract will automatically be void.

What are the parts of option trading?

Each option contract consists of at least 4 parts as follows:

Number  :  any number of contracts according to which the transaction is to be carried out is called the number of the option contract.

Expiration date  :  The expiration date of the option contract is the date after which the contract is over and the investor can no longer make changes to the transaction.

Target price  :   The transaction price is called the target price. The same amount that is determined in the option contract and based on it, your transaction is done.

Price bonus  :  Price bonus is the amount of money that the investor needs to set up the option contract to complete his transaction.

What is the option bonus and how is it determined?

As we mentioned in the previous section, the option reward is the amount of money that the investor needs to set up the option contract in order to complete his transaction. Option reward depends on the following 4 factors:

• The price of goods and assets
• The target price of the transaction
• Time left until expiration
• Fluctuations in the market

The effect of these four elements on the option bonus price can be seen simultaneously in the following table:

Types of option contracts according to the date of application

European option :   the holder of the option can only use his right to buy or sell the asset subject to the contract on the expiration date of the contract.

American option :   The holder of an American option can exercise his right at any time until the expiration date of the contract.

Bermuda call option :   Another type of call option that may be exercised before maturity. This contract is a combination of European and American options.

Types of option contracts according to the transaction

Option contracts can be concluded on various assets, some of these contracts include: stock options, stock indices, debt securities, interest rates, currency,  commodities, futures and other types of options such as electricity, weather, air pollution and such cases.

Conclusion

In option trading, the buyer acquires the right to buy or sell a specified amount of an underlying asset for a specified amount in the future from the option seller. The symbol for buying options in the stock market is the letter “z” and the symbol for selling options in the stock market is the letter “i”, which is added to the beginning of the symbol of the companies that have the possibility of purchasing options.