Put option entitles, Know the Right Time to Buy a Call Option
Call and Put options There are two types of options - "call" and "put". A call option entitles the holder to buy a certain quantity of a specific gilt at a fixed price any time during a specific period.
So, for example, it might entitle you to buy R1-million worth of Eskom 11 percent stock. This is an IOU from Eskom put option entitles will be repaid in the year and in the meantime will pay 11 percent per annum at any time during the next two weeks.
Conversely, a put option on the same stock would entitle you to sell that stock any time during the next two weeks at a fixed price known as the "strike" price. If you believed interest rates were going to fall over the next two weeks, you could buy a call option with a strike price at the current market price.
If you were right and interest rates fell, you could "call" your option and buy the stock at the strike price, knowing it could immediately be sold and net you a profit. As soon as an option can be exercised at a profit, it is said to be "in-the-money".
An "out-of-the-money" option has no value except the possibility that it will become "in-the-money" before it expires. Options represent a right to call or put stock during a specific period, and that right costs money.
By Chad Langager Updated Feb 26, A put option on a bond, also known as a put provisiongives the holder the right to demand the issuer pay back the principal before the bond matures, for whatever reason. There are several reasons why a bond holder might exercise a put provision on a bond. The holder might feel the issuer's business and finances are weakening, thus jeopardizing its ability to pay off debt. Interest rates may have risen since the bond was initially purchased, and the investor wants to recover principal to redeploy cash to investments that can earn a higher return.
In general, the longer the duration of the option, the higher the price - because the greater the probability that it will trade "in-the-money".
A one-week option on Gilts with a face value of R1-million would cost R2 A two-week option would cost R3 and a three-month option R10 This money simply buys you the option - if you choose not to exercise it you will lose the purchase price i.
R2R3 or R10depending on which you bought. In other word, the most you can lose in the put option entitles market is the money you used to buy the option.
A long put refers to buying a put optiontypically in anticipation of a decline in the underlying asset. A trader could buy a put for speculative reasons, betting that the underlying asset will fall which increases the value of the long put option. If the underlying asset falls, the put option increases in value helping to offset the loss in the underlying.
This is preferable to the futures market where losses can be much greater. How much can you make?
He has provided education to individual traders and investors for over 20 years. Article Reviewed on February 01, Gordon Scott Updated March 12, Traders buy a call option in the commodities or futures markets if they expect the underlying futures price to move higher.
The potential returns from buying the correct option at the right time can be substantial. Over the past year, in any two-week period, stock prices have moved at least R10 If interest rates move in your favour, it is possible to make three to four hundred percent on the cost of buying the option.
The easiest money to make you buy a call option valid for three months and pay R10 for it, interest rates must fall by at least 0,25 percent before you break even. Therefore, each 0,25 percent rise nets you R10 profit. You are participating in the increase in value of the underlying gilt stock.