Purchase option
A purchase option (English call option , hence the names call option , vanilla call or call for short ) is one of the two basic variants of an option . The holder of a call option has the right, but not the obligation, to buy the contractually specified good (the base value ) at a price agreed in advance (the exercise price) in a quantity agreed in advance.
If the buyer can only exercise his right at the end of the option's term, it is called a European option. If, on the other hand, he can exercise his right at any time during the term of the option , it is known as an American option. The buyer will normally only exercise his right if the price of the underlying is higher than the exercise price.
The seller of the purchase option is obliged to deliver the base value; for this obligation he receives the option premium from the buyer of the option.
In practice, however, the underlying is usually not delivered when the option is exercised. Instead, a cash settlement takes place in which the seller of the purchase option pays the buyer the difference between the market price of the base value at the time of exercise and the exercise price. Whether a cash settlement takes place when exercising or whether the underlying is delivered is already determined when the contract is concluded.
Example of a hedging transaction
A grain trader plans to buy 10 tons of wheat at the future harvest time. He wants to protect himself against the fact that by then the price of wheat will rise to over € 200 per ton. So he buys an option to buy 10 tons of wheat at € 200 each. If the price of the base value (here wheat) is at € 250 per tonne of wheat by the time of harvest , i.e. above the exercise price (here € 200), the seller of the option must sell the trader 10 tons of wheat at € 200 each. Alternatively, the trader can buy the 10 tons of wheat on the market for € 250 per ton. The seller of the option then reimburses the trader (€ 250 - € 200) · 10 = € 500. The grain trader has secured himself against a rise in the price of grain by paying an option premium.
In principle, such transactions can be concluded between any two parties without any personal reference to the underlying asset, in this case grain.
Long call position
The buyer of a call option is in the so-called long call position (right to buy). He pays the option premium for this right (red section in the diagram).
If the price of the underlying is above the exercise price, the option is in the money.
On the day of exercise, the option has an intrinsic value if the price of the underlying is higher than the exercise price. For the owner of the call, however, the transaction was only a profit if the price of the underlying is so far above the exercise price that the option premium is also compensated, i.e. H. the green line in the adjacent diagram is in the profit zone.
If, on the day the option is exercised, the value of the underlying is below the exercise price, the buyer loses the entire premium. Since theoretically the value of the base value can grow infinitely, the chance of winning the option based on it is theoretically infinite.
The loss of the buyer of a call option is limited to the amount of the premium, but his profit can theoretically be infinite.
Short call position
The seller ( writer ) of a purchase option is in the so-called short call position (obligation to sell).
His profit / loss is exactly the downside of the long call position: the option premium is paid by the seller of the option in any case. However, the seller cannot achieve more than the profit from the option premium.
However, the loss of the short call position is theoretically unlimited, since the price of the underlying is not limited, but the writer has committed to sell at the strike price.
Zero strike call
A zero strike call (or zero call or standard tracker) is a call option with a strike price of 0 of the referenced underlying. In contrast to investing in a share, the investor does not receive a dividend. This can be different for zero strike calls on indices, since various indices contain dividends or interest. Another difference to a direct investment in a share is the limitation of the term, which a call option implies per se.
A zero strike call can be constructed in several ways:
- The seller (or issuer) of the zero strike call holds the underlying asset and thus speculates on increasing dividend payments. The positive change in the dividend payment can then be earned as a profit.
- The seller (or issuer) of the zero strike call buys and sells call options with different levels of leverage. With the remaining money he buys a zero coupon bond . With this construction, the bought call option has at least 1 higher leverage than the sold call option (see discount calls ).
Strategies with calls
literature
- John C. Hull : Options, Futures, & Other Derivatives. 5th edition, international edition. Prentice Hall, Upper Saddle River NJ 2003, ISBN 0-13-046592-5 ( Prentice Hall Finance Series ).
- Michael Bloss: Securities, Options & Futures. The basic work. Pro Business, Berlin 2005, ISBN 3-938262-72-9 .