JSE Equity Options: Options Defined
An option provides the holder the right (not obligation) to buy
(call) or sell (put) a specified quantity of an underlying asset at a
predetermined price at or before the expiration of the option.
Option Analogy: Imagine you want to buy a house but you’re not sure.
You can buy an option from the seller to purchase the house at a certain
price at a specified date in the future. When you get to the future
date and house prices have gone up, you will be able to buy the house at
the original price.
Put Option Analogy: You’ve got insurance on
your house, you should consider insurance on your share portfolio. If
your house burns down, your insurance company will pay out the insured
value of the house. For this insurance you’ll have to pay a premium.
Four possible Option positions:
- Long Call – Has the right to buy
- Short Call – Has the obligation to sell
- Long Put – Has the right to sell
- Short Put – Has the obligation to buy