Mechanics of Stock Option Trading Options are a form of security mainly reserved for the sophisticated investor who is able to understand its inherent risks and practical uses. Options are attractive due to their versatility and their capacity to interact with other orthodox assets, for instance, stocks. They empower an investor to adjust their position as the market shifts. For example, options are an effective hedging tool to safeguard against a subdued stock market hence minimizing losses. Additionally, options can either be used for speculative purposes or as a conservative investment. Option trading forms part of an investment strategy (Hayes, 2017). The trading of options and the negotiations of the terms of the contract happen in an over-the-counter (OTC) market. The OTC market is advantageous over the exchanges because it allows for the tailor-making of a contract—that is a negotiated
A trader owns 1000 shares of Coca-Cola at a current price of $46.10 (Google Finance, 2017) and wants to keep ownership of them until next year so that they can defer tax payment on their profit but only pay the capital gains tax. The trader purchases ten protective puts with a strike price of $45 with a January 2018 expiration date. Also, they sell ten calls at the strike price of $50 with a similar expiration date. Therefore, the trader gets $550 for the covered call and pays $450 for the puts—netting $100. If the KO share rises to $50, then the trader pockets $50,000. But if the share drops to say $40, then the share would be worth $40,000 and the puts $5,000. A further drop in price increases the value of the puts that is directly proportional to drop in share price. Consequently, maximum payout for the share would be $50,000 and the least would be $40,000. Considering $100 was already earned then the trader’s position would be collared at $40,100 lower bound and $50,000 upper
The negotiations were successful! An agreement was reached and I got the job! This success was due in large part to the extensive planning prior to the negotiation with Robust Routers. Planning is critical to a successful outcome when negotiating (Lewicki, Saunders & Barry, 2011). This was especially true in negotiating this job offer as the bargaining mix included items as varied as state of residence, salary and even stock options. Also of great benefit was that both sides realized that the while the outcome was important the relationship would be protected and even strengthened as a result of our collaborative negotiation (Lewicki, Saunders & Barry, 2011).
One such difference lies in the acceptance of an offer. Under the common law of contracts, an acceptance must objectively manifest intent to contract. Under the UCC, a contract for the sale of goods may be formed in any manner sufficient to show agreement, including conduct by both parties that recognizes the existence of a contract, even without an explicit expression of
The threat of online competitors is also present to every discount broker that has not switched to online trading or chooses to remain with their current business model and not offer online services. These online trading sites have unique trading capabilities that otherwise are not present at Edward Jones. They offer sound advice on stocks and other investments instantly. Each customer has to call their Edward Jones advisor in order to place a trade. This makes sense to Edward Jones because they want to help prevent the rash decisio...
Money related derivatives empower companies to exchange particular monetary dangers, (for example, premium rate hazard, cash, value and product value hazard, and credit hazard, and so ...
The goal is to teach you to wear the glasses of a professional trader who sees the difference between low and high-probability trades. With these new glasses, your trading account gradually reflects the consequences of making high-probability trades. With more money in your trading account, you can buy more contracts. You experience the law of compounding, and your account grows exponentially.
Equity markets have become much more volatile. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a “key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility.” When the last M&A Outlook was written, the VIX was at 11.57. At the start of November 2007, the VIX had increased to 23.21.
Real options analysis as a tool for making investment decision is taking into account uncertainty and building flexibility in the system. In the real option analysis, more elements are drawn as follows: 1) the time elapsed until the option is no longer valid or time to expiration, 2) the volatility of the returns to the investment or underlying risky asset. It offers a supplement to the NPV method that considers managerial flexibility in making decisions regarding the real assets of the firm.
Hedging depends across various motives. For example, if a manager intends to minimize corporate taxes, he will hedge taxable income. Stulz (1984) and Smith and Stulz (1985) indicate that progressive tax rates and consequently convex tax schedules cause the firm’s expected tax liability to rise with variance of taxable income, indicating that hedging boosts firm value by decreasing the present value of future tax liabilities. If the corporate managers’ main concern to reduce financial distress costs and if the manager can faithfully communicate the company’s probability of default, the manager’s strategy will concentrate on the market value of debt and equity.
The exclusion clause is an important device for allocating the risks between the contractual parties. However, the exclusion clauses could mostly be found in written contracts, especially standard form of contracts. Standard form contracts with consumers are often contained in some printed ticket, or delivery note, or receipt, or similar document. In practice, it is very common that if a person wants the product, he may have no alternative but to accept the terms drawn up by the other party even though such terms are disadvantage to him, or he may simply accept it regardless the possible unfavorable position because he does not trouble to read a long list of terms and conditions. Therefore, contracts are regularly signed, tickets are simply accepted, or a tick-box on a website is clicked, commonly between large companies and individual consumers.
In every industry, there are a lot risks that cause many uncertainties regarding the financial security of different corporations; risks in the short run and in the long run. For that reason, large corporations often allocate a large amount of capital into competent risk managers who are tasked to identify the different risks faced by the company, and to develop efficient risk managing or hedging techniques to handle them.
reducing weights in options. This is because they can earn even more money that could have been
After the financial crisis of the late 1990s, the demands for risk management tools have increased. The investors have been effectively utilizing such products as KOSPI 200 futures and options, 3-Year KTB futures and USD futures to meet their hedging needs.
I became an enthusiast of finance ever since I was at high school. At the political economy class, my teacher asked us: if you have a million RMB, how would you use it? She then introduced us the concept of investment, and I was intrigued specifically by the stock. For the latter two years of my high school, I have been reading books and articles regarding the stock market in the U.S. and in China. As one of the outstanding students ranked top 1% in College Entrance Exam in Hainan Province, China, I was accepted by the City University of Hong Kong with a full scholarship. With the strong interest in finance, I chose quantitative finance and risk management as my major.
Rendleman, R. J., 1999, Option Investing from a Risk-Return Perspective, The Journal of Portfolio Management, pp. 109-121.
The company listed on the JSE (Ltd) that I have decided to focus on is Pick n Pay. I have chosen this company as, since the first store was established in 1967, 941 stores have been opened countrywide in South Africa (FastMoving, 2012), which leads me to believe that this specific franchise has a very good sense of business sustainability.