Syndicate
Sales Option
However, the sales option or put option gives the right to sell at a predetermined net price during a determined period of time. The issuer of the sales option is obliged to buy the securities in case it is demanded by the vendor. The sales option lacks of value when the market price is higher than the exercise price. The option can benefit the vendor, in case the exercise price is higher to that of the market price.
Scheme of a sales option
The vendor of an option contract no matter if it is of purchase or sale, must deposit a guarantee at the stock exchange market that is responsible for the liquidation.
There is no kind of relation between the taker and the giver of an option contract.
The two basic strategies to follow with the sales options are the following:
- purchasing a sales option (long put). Gives you the right to sell in exchange of the premium paid. The purchaser will exercise the option when the exercise price is higher than the market price of the underlying asset. In this case the benefit will be equal to the difference between the exercise price of the asset minus the market price and less than the premium paid.
In case the market price is higher than the exercise price, the buyer of the option will not exercise the sales option, due that it is better for him to sell the asset on the market.
Usually, the sales options are acquired by those investors that foresee that the market price of the underlying asset will fall during the standing period of the option. - to sell a sales option (short put): in exchange for perceiving the premium there is an obligation to buy, if demanded by the buyer of the option.
The sales options are sold by those who foresee that the quotation of the underlying asset will be above the exercise price.
With the buying options as with the sales options, when the exercise price coincides with that of the market price of an underlying asset. It is said that the option finds itself “at the money.”
In these cases, the purchaser of the option will not be interested in exercising it. The same will happen when the option finds itself “out of the money.”
In buying options, this situation is produced when the market price of the asset is lower than the exercise price. In the sales option, the situation of out of the money is produced when the exercise price is lower to that of the market price of the asset.
It is said that an option is “in the money” when one of these two following cases are given:
In the buying options, the exercise price is less than the market price of the underlying asset.
In the sales options, the exercise price is higher than the market price of the underlying asset.
In both cases, the buyer of options will be interested in exercising it. let?s see some examples of operation with options:
- an investor that owns shares can reduce the risk of a falling of prices of the same by buying sales options. In case an important fall of the shares prices is produced, the buyer of a sales option can exercise its option and sell the securities at the prefixed price and this way he avoids losses that are consequence of the falling of the market.
An investor that is interested in buying in the future shares of a determined company, can purchase a buying option of the same. In this way, in case the shares rise in their price too much, he may acquire them at the prefixed price as agreed during the contracting of the buying option.