1.3 Lessons learnt
- Option contracts have several characteristics that define their terms. These include the underlying value, expiry date, strike price, and whether the option is a call or a put.
- Put options give the holder the right to sell shares at a predetermined price until a specific date, while call options give the holder the right to buy shares at a predetermined price until a specific date. Whether an option is in/at or out of the money depends on whether the contract has any monetary value.
- The price of an option has two components: intrinsic value and time value. For sellers of option contracts, the time value is the most crucial component. The price of an option is driven by the underlying value, duration, and implied volatility.
- Investors may buy call options as either a speculative move or an alternative to buying shares outright. They may buy put options as a form of insurance against a decline in share prices, or as a speculative move to profit from a drop in price.
- Selling call options is a viable option for shareholders because it provides a premium, and the only downside is the possibility of having to sell shares. It can also allow investors to focus on a specific strategy. Selling put options can generate income for potential future purchases, but it does not involve buying shares directly.
- It’s crucial to consider the underlying size of the position when trading options. Combining call and put options can help manage entry and exit points.