Predetermined risk with unlimited profit potential

The essentials of options

Options

The buyer of an option contract has the right, but not the obligation, i.e. the option, to exercise it. Option transactions are therefore also considered conditional forward transactions.

The options contracts (long calls, long puts) brokered by LVAM are standardized, do not include a margin call and can be bought and sold on each trading day. Accordingly, in any case the maximum loss is limited to the investment amount.

Options can be used to profit from rising (call option) as well as falling (put option) prices of the respective market. The option premium, which reflects the value of the option, changes with the price trend and volatility of the underlying and the respective defined term. Die Laufzeit limitiert das Ausübungsrecht einer Option. If, in the case of a call option, the strike price defined at the time of purchase is higher than the price of the underlying security at the end of the term, the option expires worthless.

In the case of a put option, the reverse is true. Options trading allows the whole range from an extremely speculative orientation (e.g. “out-of-the-money” calls) to pure hedging (e.g. “at-the-money” puts). The necessary knowledge is essential for successful trading in options contracts.

Options contracts

Long-Call

The options contracts (long calls, long puts) brokered by LVAM are standardized, do not include a post-closing obligation and can be bought and sold on each trading day. Accordingly, in any case the maximum loss is limited to the investment amount.

Long-Put

Options trading allows the whole range from an extremely speculative orientation (e.g. “out-of-the-money” calls) to pure hedging (e.g. “at-the-money” puts). The necessary knowledge is essential for successful trading in options contracts.

BENEFITS OPTIONS

  • Reduced capital requirements through leverage.
  • As a buyer only rights.
  • High return potential with limited loss opportunities.
  • Yield opportunities with rising and falling price developments.
  • No issuer risk.

Example Call-Option

16 September 2013
The cocoa price (cocoa is traded on the ICE – InterContinental Exchange/New York) is quoted at USD 2,609 per ton. They expect the cocoa price to rise to over USD 3,000 per ton by the end of the year. You decide to buy a call option (speculation on rising prices). Each individual cocoa call option includes the right to purchase 10 tons of cocoa at a fixed price within the defined term. You can resell this right at the current price during the entire term.

Buy Call-Option
Purchase date: 16. September 2013
Contract: Cocoa – ICE (InterContinental Exchange)
Number of contracts: 30
Duration: März 2014 (letzter Handelstag: 07.02.2014)
Base Price/Strike: 3‘000 USD (from money)
Premium: 79 USD per ton
Contract size: 10 metric tons
Option premium
79 USD x 10 = USD 790.00
Number of option contracts 30
Net purchase price
(Amount effectively placed on the market) USD 23’700.00
Commissions
30 x 190 USD, max. 25% of the net purchase price USD 5’700.00
Total cost
Net purchase price + commissions USD 29’400.00

6 Januar 2014
The cocoa price (Cocoa traded on the ICE – InterContinental Exchange/New York) has risen slightly, but is still quoted well below USD 3000 per ton. To avoid a possible total loss, you decide to sell the option.

Sell Call-Option
Date of sale: 6. Januar 2014
Contract: Cocoa – ICE (InterContinental Exchange)
Option premium
32 USD x 10 = USD 320.00
Number of option contracts 30
Premium income, 30 x 320 USD = USD 9’600.00
Less total cost USD -29’400.00
Net loss -67.34% USD -19’800.00

Example put-Option

20 August 2013
The corn price (corn is traded on the CME GROUP/Chicago) is quoted at 490 US cents per bushel (1 bushel corn = 25.4 kg). They expect the corn price to fall further. You decide to buy a put option (speculation on falling prices). Each individual corn put option includes the right to sell 5,000 bushels of corn at a fixed price within the defined term. You can resell this right at the current price during the entire term.

Buy Put-Option
Purchase date: 20. August 2013
Contract Corn – CME GROUP
Number of contracts: 100
Term: March 2014 (last trading day: Feb. 21, 2014)
Base Price/Strike: 450 US cents per bushel (out of money)
Premium: 16 US cents per bushel
Contract size: 5‘000 Bushel
Option premium
16 US Cents x 5‘000 = 80‘000 Cents = USD 800.00
Number of option contracts 100
Net purchase price
(Amount effectively placed on the market) USD 80’000.00
Commissions
100 x 190 USD, max. 25% of the net purchase price USD 19’000.00
Total cost
Net purchase price + commissions USD 99’000.00

20. Dezember 2013
The corn price (Corn traded on CME GROUP/Chicago) has continued to fall, as you expected, and is now trading at 431 US cents per bushel. Accordingly, the premium of your put option has also increased. You decide to realize the profit.

Sell Put-Option
Date of sale: 20. Dezember 2013
Contract Corn – CME GROUP
Option premium
26 1/4 US Cents x 5‘000 = 131‘250 Cents = USD 1’312.5
Number of contracts 100
Premium income, 100 x 1’312.50 USD = USD 131’250.00
Less total cost USD -99’000.00
Net profit +32.57% USD +32’250.00