Comprendre les OPTIONS | Achat/Vente | CALL et PUT | Explications et Exemples pour Débutants - YouTube

Hello and welcome to everyone in this new video, here Angélique from Invest in French.

Today I'm going to tell you about a stock market tool that is part of the derivatives family.

But what is a derivative product?

Well, it is a financial instrument whose value varies according to the evolution of an asset,

also called the underlying asset,

most of the time these are shares.

They were created to allow companies to hedge against different types of risks,

and more particularly against the risk of fluctuations in the price of raw materials.

There are several types of derivatives but the 3 most important categories are options, warrants and futures.

Today I will tell you about the options.

I'm not going to go super deep in the explanations because it's a very complicated subject,

on which we can spend hours or even weeks discussing.

There are hundreds of different approach techniques and trading strategies,

depending on whether you are going to take a lot of risks or not.

I will try to explain the basics to you, using concrete examples from everyday life,

while introducing the technical terms of the background.

I won't go into too much detail because I don't really master this kind of tool, since I don't trade them yet.

But I just want you to understand the basic concept because for my next video,

you will need to understand the principle of options, so a little technical lesson beforehand is preferable.

Before going any further, if you haven't already done so, don't forget to like this video, subscribe to the channel,

comment and also share, as you know how to do so well.

Thanks in advance.

And now let's learn new things.

A little history point to start.

You should know that the options are not something new.

The first options were used in Ancient Greece to speculate on olive harvests,

so quite a few centuries ago.

The furthest that can be found in the history books on stock options

dates back to 1688, on the Amsterdam Stock Exchange,

which at the time offered 3 types of transactions, on 3 different types of markets:

the spot market, the futures market and the options market.

As for the current regulated options, also called listed options,

they have existed in the United States since 1973,

in Canada since 1977

and in France since 1987.

But what is an option?

An option is a contract or financial commitment between two parties,

a buyer and a seller,

which gives the right, but not the obligation, to buy or sell a specific commodity

called an underlying asset,

which may be stocks, commodities, indices, and even cryptocurrency now,

and all this at a price agreed in advance, called "strike price" or "prix d'exercice" in French,

also having a predetermined period of validity, roughly a "due date" or "expiration date" in English,

and upon payment of a "premium" or "prime" in French.

I know that's a lot of technical terms in the same sentence, but I promise, you'll see it digested well once you understand the principle.

There are 2 different types of options:

European options and American options.

And it is not because an option is listed in Paris that it is necessarily European style,

it can just also be American style,

so you will understand that the style of option does not depend on the location of the stock exchange.

For American type options, the option contract can be exercised at any time before the expiration date.

While for European-type options, it is necessary to wait for the end of the validity of the contract to be able to exercise it.

Another difference between the 2 styles of options is the number of shares to which the contract will relate.

If it is an American type, it will be 100 shares, whereas if it is a European type, it will be 10 shares.

This is also called the "quota".

Options on currencies and indices are always of the European type.

While options on stocks, ETFs, commodities, etc. they are always of the American type.

Now let's see the 3 big differences that exist between options and so-called normal stocks.

The first difference is that an option contract has an expiration date,

which can be today or in 3 years.

So if you are trading options, you need to take this time range into account.

After the expiration date, this option will no longer exist and will disappear from your stock portfolio,

unlike a normal share which once purchased belongs to you until it is sold,

unless the company is delisted, but that is still something else.

The second difference is that options have a strike price.

The strike price is when an option can be converted into shares, whether for buying or selling.

For example, if I have an option that has a strike price of $ 100,

if I exercise that option in the future,

it means that I could trade that option for buying or selling, of shares using this option.

It's probably a bit of a fuzzy explanation, but stick with me, I'll explain all of this in more detail later,

and you'll see, it's not as complicated as it sounds.

The third difference is that you cannot buy or sell a single option.

The options are contracts and result in a multiplier of 100.

For American type options, as we have seen previously.

Basically, when you see the price of an option, you will always have to multiply it by 100, because it can only be bought by a factor of 100.

For example, if I see a normal share of a company at 60 dollars,

I can buy it for $ 60,

so I'll own a share of that company for only $ 60.

On the contrary, for an option, if the displayed price is 60 dollars,

unfortunately I will not be able to buy it with 60 dollars,

it will take me $ 6000 to buy this option plus the amount of the premium.

Because an option contract can only be used to buy 100 shares,

so you have to multiply the option price by 100 to get its total value.

But how does it work?

Before going into more depth, I wanted to add here that you don't have to own the underlying asset,

so shares most of the time,

to be able to buy or sell an option.

First I'll tell you about buying options.

You should know that in general, the purchase price of options will increase if the price of the underlying assets increases,

and conversely decrease, if the price of the underlying assets decreases.

To really understand how it works in the first place, I'll start with a simple, illustrated example.

Take Jean, this year, he wants to go on vacation in the south of France.

He found a wonderful rental villa that would be perfect for him and his friends.

Summer promises to be hot !!

To be sure he can rent this villa, he will sign a contract with a rental agency and pay a deposit.

Usually it's 25% of the final rental price,

so let's say it will be $ 1,000 here.

A month before leaving, big news in the celebrity newspapers,

Celine Dion also decided to come and spend her holidays in the south of France,

and exactly in the same small village as Jean's villa,

the place promises to be lively this summer !!

Three scenarios are therefore possible.

First possible scenario, Jean is a big fan of Celine and sees this news as a sign.

He will finally be able to meet her and have his photo with her.

He's super happy, he's going to have the best vacation of his life,

he's going to 200% exercise the contract, and go on vacation to this villa.

Second possible scenario, it sucks, there will be tons of people, it will swarm with paparazzi, fans of all kinds and security.

It's going to be a mess, Jean and his friends won't be able to party every night and walk around as they want,

there's no way, Jean cancels his reservation and decides to go to Brittany instead.

It will certainly be less hot, but at least it will be less crowded.

However, Jean will have lost his $ 1,000 deposit, paid at the signing of the contract.

Third possible scenario, the rental price has doubled,

Jean decides to take the opportunity to make some pocket money,

too bad for the holidays in the sun, it will be for next year.

He decides to resell his rental contract to the same agency with which he had signed it,

in exchange for the difference in price that the rental could be rented out again, at time t.

So he pocketed $ 2,500.

Knowing that he had already paid $ 1,000 in deposit, he therefore ultimately has $ 1,500 in his pockets.

Let's be honest, he could just as easily have sublet this rental and made even more money,

but that should not be said in front of everyone because it is totally illegal.

Sounds simple explained that way, doesn't it?

Well, options are exactly the same, they're contracts that a buyer makes with a seller,

for a premium, with a pre-agreed price and an expiration date.

When we make a purchase option, it bears the technical name of a CALL.

The buyer of a call buys the right and not the obligation to buy an underlying assets.

The seller of a call on the other hand, has the obligation to sell his underlying asset, if the buyer exercises his right to purchase.

The buyer of a call therefore anticipates an increase in the price of the underlying asset in order to be able to make money.

If I take another example, but this time with the purchase of a real option.

We have an X share which is currently at $ 120.

If we make an option purchase so a Call Option on this stock,

we choose the strike price at $ 120,

with an expiration date of 30 days from now and a premium of 5 $.

This means that by buying this call, we have the right but not the obligation to buy 100 shares of this option at $ 120 per share,

anytime in the next 30 days, regardless of the price of the action.

Fifteen days later, the share price rose to $ 135.

It's all good, we will have the money coming in, so we exercise this option by buying these 100 shares.

So we're going to spend $ 120 multiplied by 100,

plus the $ 5 bonus multiplied by 100,

which gives a total of $ 12,500.

As we said previously, American type option contracts give the right to buy 100 shares.

Direct after buying these shares,

we resell them, so we will have made a profit of 135 minus 120,

or $ 15 per share, multiplied by 100,

or $ 1,500, less the premium of $ 500, so a profit of $ 1,000.

You will tell me, but this is a scam!

If I had bought those 100 shares at $ 120, then sold for $ 135, I would have made a profit of $ 1500!

Well, that's not wrong!

But if, on the other hand, the price drops to $ 110 because we messed up our price forecasts,

we will not exercise this option contract,

and instead of having lost $ 1000 by buying and selling stocks at a loss,

we will have lost only the $ 500 of the premium,

and here we are happy to have made a purchase of options,

rather than having bought normal shares.

You can think of options as insurance contracts.

It is a protection not to lose too much, if we make the wrong choices or the wrong predictions.

The graphical representation of the purchase of a call looks like this.

We have the amount of the premium which means that we always go negative.

But once you have passed the amount of the strike price plus the premium, it's good!

You can exercise the option, so become the owner of 100 shares

and sell them immediately to make a profit.

For our example, anything above $ 125 is all right.

In technical terms, everything that is before the $ 120,

we say that we are "Out of the Money" = "hors de la monnaie",

basically we lose money.

Between 120 and 125 dollars, we are "At the Money" or "à la monnaie",

so we save the day, reducing losses.

And all that is after $ 125, we are "In the Money" = "dans la monnaie",

that's what you have to achieve, is where you make money from.

As with John in our example and his 3rd scenario, I would say that 90% of those who trade options

do not execute the final deal.

That is, they never buy the underlying assets.

They resell the option before the expiration date, and when they feel they have a good profit on it.

Now let's look the other way around for options writing.

Let's take a simple example, this time an example we all know and even if we don't like them too much,

sometimes they can be useful.

I am of course talking about our dear insurance.

When you own a car, you must take out insurance.

We therefore pay an annual or monthly premium, which we must repay on a recurring basis, every month or every year.

If our fully insured car is stolen,

we will be reimbursed at the cost of the car's value less the drop in value.

We will so be refunded the amount we could potentially sell it at that time,

less the amount of the premium paid when the insurance was taken out.

Well, it's the same principle for selling options.

Simple, isn't it?

For technical terms, when we sell an option we say we are making a PUT.

The buyer of a put buys the right to sell an underlying asset.

The seller of a put has the obligation to buy the underlying asset, if the buyer exercises his right.

The buyer of a put therefore anticipates a drop in the price of the underlying.

Now an example with the options.

Writing an option is the same as going “short” with stocks.

Consider a stock that is currently at $ 120.

If we put option on that stock, with a strike price of $ 120,

an expiration date of 30 days from now and a premium of $ 5.

If after 15 days the share price drops to $ 100.

Banco, we are a winner!

We buy 100 shares at $ 100,

which we will resell with our option at $ 120,

which means that we will make a capital gain of $ 20 per unit,

or $ 2000, less the premium of $ 500 or a profit of $ 1500.

Of course, in this case by dealing with the normal stocks, we would have made direct $ 2000 and not just $ 1500.

But if instead the price had increased to $ 140, instead of losing $ 2000, we would have lost only the $ 500 of the premium.

The graphical representation of a put is the opposite of that of a call, and looks like this.

We always start in the negative with the amount of the premium,

then, once the share price is lower than the amount of the strike price plus the premium,

then we start to make money if you exercise your option.

In technical terms, anything after the $ 120 is said to be "Out of the Money".

Between 115 and 120 $, one is "At the Money".

And all that is before the 115 $, one is "In the money".

When it comes to selling a call or selling a put, the losses are limitless,

I would not advise you to approach it as a beginner.

The seller pockets the premium when signing the contract, so he always goes for the positive,

unlike the buyer, but he has no insurance, since he is the insurer.

So if we take our previous example with our call option,

each time the share price exceeds the amount of the strike price plus the premium,

the seller will lose.

And the more the stock price increases,

the more he will have to buy high-priced stocks, to fulfill his end of the contract.

In numbers it can be, if the option buyer bought an option at $ 120 plus a $ 5 premium,

if the share price goes up to $ 150,

the seller will then have to buy the 100 shares at $ 150 ,

so $ 15,000 to resell them to the buyer of the call at $ 120 per unit,

ie a loss for him of $ 3,000.

Minus the $ 500 of the premium, so the seller will have lost a total of $ 2,500.

And if the stock keeps going up to $ 200 for example,

the losses will amount to 200 x 100 - 12,000 - 500, or $ 7,500, and so on.

As the price of the shares can go up ad infinitum, the seller's losses can also be ad infinitum.

For the sale of a put it's the same, but the opposite.

If the stock price goes down, then the seller will have to buy a stock at a high price,

here $ 120, when the current price is $ 95 for example.

What makes a loss of 95 x 100 - 120 x 100 minus $ 500 premium,

equals $ 2000.

But if the price drops to $ 20, then the terminal loss will be $ 9,500.

So please don't go into this.

If you are not familiar with options, you can lose everything in the sale of a call or put.

I also wanted to add 2 last points which seem important to me.

The first is that the amount of the option's premium, therefore its price for the buyer,

varies according to several factors which are the price of the underlying asset,

roughly the price of the share,

the strike price of the option,

but also the volatility of the share price.

If its price changes a lot, the price of the option will be higher than if the price of the stock fluctuates very weakly,

because there is a greater chance that the option will be exercised.

And we can also add the time value or extrinsic value.

Basically, the longer the expiration date, so the greater the likelihood of the option fulfilling,

the higher the price will be.

And conversely, the closer the expiry date, the more the time value will be zero and therefore its price will be low.

And my last point is that there are a lot of other important technical terms if you really want to go deep into the options study.

What I'm not going to do here, but a term that strikes me as easy enough to understand is the intrinsic value of an option,

which is the spread between the strike price and the share price.

For example, if we have a call option at 80 dollars,

if the share price goes up to 100 dollars,

the intrinsic value is the difference between 80 and 100,

so 20 dollars.

Now let's see some of the advantages of the options.

The first is that trading options requires less capital than trading so-called normal stocks.

Indeed, most of the time traders do not exercise their options, so they do not need to have huge capital.

The 2nd advantage is that unlike normal stocks, when you are the buyer of options, in calls or put,

you know in advance how much you can lose at most, and that is the amount of the premium.

Unlike sellers as we have seen previously, which sees its potential losses go on and on.

The 3rd advantage is that options give exceptional leverage

to make money much faster than normal stocks.

Let me explain, when you buy an option you don't buy the stock itself, you just buy the premium.

3/4 of the time experienced traders never exercise their options.

They sell it before the expiration date and above all he sells it as soon as the profits are present and significant.

But to come back to the leverage effect, if the total purchase amount of the contract is $ 4000 while my premium is $ 1000,

my leverage is 4.

By buying options, the effect of leverage is more interesting than buying stocks

because it is cheaper and less risky.

The 4th advantage, which is somewhat related to the second, is that the prices are secure for buyers.

It's a contract, so it's all written in black and white.

There you go, it's over for today.

I remained fairly light in the explanations, well I still went quite deep too,

I never manage to stop when I start the research.

I hope you will have understood the basic principle anyway,

without going straight into investing in options,

even if it is quite tempting.

I advise you to do some virtual trading, before getting into the real world,

because although it is more secure than normal stocks, there are hundreds of strategies out there,

and it can be quite confusing for a beginner.

Here is the example with all these nice technical graphics.

In conclusion, what must be remembered

is that the buyer of a call option is exposed to a potentially unlimited profit

with the price of the underlying which can increase to infinity,

for a maximum loss limited to the premium paid initially.

The buyer of the put is exposed to the same results of losses and gains.

On the other hand, the call seller sees his profit limited to the premium received at the signing of the deal

and his significant and unlimited potential loss if the market rises.

The same is true for the put seller, if the market goes down.

If you ever have any questions, don't hesitate to ask them here, I'll try to do my best to answer them,

even if as I said before, I don't trade this kind of tool at the moment,

so I don't really know the subject in real life, only on paper.

Thank you all for your loyalty.

Don't forget to like the video, subscribe to the channel, and comment.

Thank you again and see you soon.