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What are options, weekly options and option leverage?
There are different types of options for those who want to engage in equity trading.
Options are defined by Investopedia as financial derivatives allowing equity traders to have the right but not the obligation to buy (call) or sell (put) securities or other assets at a prearranged price and date. It is basically a contract between the seller known as the option writer and the buyer known as the option holder.
Option sellers vs. option buyers
Option writers and option holders have opposite speculative views about the price trend of a particular asset. For instance, call options provide buyers the opportunity to earn profits by buying an option for an asset or security at an agreed-upon specific price and at a predetermined date.
The buyers expect the asset price to go up, which means that they can buy at a lower price—the fixed price offered—and then sell the asset at the prevailing higher market price. Buyers will then earn profits in the process.
On the other hand, option writers expect the asset price to go down on the specified date. This will allow them to profit by selling at a previously agreed-upon fixed price that turns out to be higher than the asset value on a specified date known as the exercise date. It is the date in which the option writer is required to release the asset to the buyer.
Weekly options
A variation of trading options is the weekly options. As the name implies, these are option contracts offered by option writers—whether individuals or companies—that expire on a weekly basis.
The first standard call options were introduced in 1973 by the Chicago Board Options Exchange (CBOE). Meanwhile, CBOE also introduced put options in 1977. These financial derivatives became very popular among investors who wanted to have some leverage. For a period of around 36 years between 1973 and 2009, the trading volume for options grew at a yearly compounded rate of more than 25 percent.
CBOE then introduced the weekly options in 2005 as a pilot program. These are similar to monthly options in almost every aspect, but they are short-lived, lasting only for eight days. These options are introduced every Thursday and expire on Friday. The expiration date, however, is adjusted if there are holidays in between.
Profits and volatility
Shorter expiration periods mean that traders have more opportunities to earn profits. It also means that fewer data are necessary to predict the short-term trends and volatility of the market. Many investors are attracted by the shorter period of waiting for their options to mature. The weekly options trading increased since 2009 with a daily volume of more than 520,000 contracts in 2017.
Trading in options has inherent financial leverage in terms of potential profits. Investors do not need to borrow a large capital or have a highly diversified portfolio to earn profits. The weekly option trades provide leverage in terms of time and diversified opportunities. However, the basic leverage in options trading is the difference between the pre-agreed contract price and the maturity value of the asset on the day the contract expires.
For instance, if an investor bought an option for 100 shares of company stock at $100 per share, the value may double if the option contract is valued at $200. This means that the buyer can potentially control more shares than previously bought.
Leveraging trade positions in options are subject to market trends like volatility. Options provide sufficient leverage, but they are also susceptible to speculations. Weekly options can be tricky if the market is highly volatile.
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