An options contract is a useful financial instrument in the derivatives market, offering flexible opportunities for investors to hedge risks and seize profits. This article will delve into the concept of options contracts, analyze the differences between call options and put options, and discuss specific situations for each type.

If you're looking for safe and effective investment opportunities, let's explore options contracts in detail with SFVN in the article below!

Options Contracts Help Protect Capital and Anticipate Profit Opportunities

Overview of Options Contracts

What is an Options Contract?

An options contract is a financial agreement where the buyer has the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price at a specific point in the future. Options contracts are typically divided into two main types: call options and put options.

These options can be applied to a variety of assets, such as stocks, commodities (crude oil, coffee, corn, etc.), or financial indices. With the flexibility in trading and risk management, options contracts have become popular tools for both individual investors and businesses participating in the derivatives market.

What is a Call Option?

A call option gives the investor the right to buy the underlying asset at a fixed price (called the strike price) on the expiration date. Call options are typically used when the investor expects the price of the underlying asset to rise in the future, allowing them to buy at a lower price than the market price.

What is a Put Option?

A put option is suitable for investors who expect the price of the asset to decrease in the future. A put option allows the investor to sell the underlying asset at a previously agreed price, protecting them from the risk of a decrease in value.

Options contracts are a smart choice for investors looking to hedge price risks.

How Options Contracts Work

To better understand how options contracts function, it's essential to look at the key factors that influence this type of investment:

• Underlying Asset: This refers to the commodity or financial asset on which the option is based. For example, options can apply to gold, crude oil, or stocks.

• Strike Price: The price at which the option can be exercised. This is a crucial factor when deciding whether to buy or sell the option.

• Expiration Date: The date by which the option must be exercised or will expire.

• Premium: The amount the buyer pays to own the option. The premium is influenced by factors such as the volatility of the underlying asset, time until expiration, and market supply and demand.

Example: Suppose an investor predicts that the price of coffee will rise significantly in the next three months. To take advantage of this opportunity, they decide to buy a call option with a strike price of 50,000 VND per kilogram.

• Option Premium: The investor pays a premium to acquire the right to buy coffee at the agreed price.

• Scenario After 3 Months: If the actual price of coffee increases to 60,000 VND per kilogram at the expiration date, the investor can exercise the option and buy coffee at the agreed price of 50,000 VND per kilogram.

Profit:

• The investor will sell the coffee at the current market price of 60,000 VND per kilogram, earning a profit of 10,000 VND per kilogram.

• However, the actual profit will be 10,000 VND per kilogram minus the premium paid for the option.

Options Contracts Help Investors Manage Risks and Access the Market Flexibly

Rights and Obligations of the Parties in an Options Contract

The rights and obligations of the parties involved in an options contract are as follows:

Source: MXV

When Should You Buy Options Contracts?

Options contracts are a flexible financial tool, suitable for a variety of purposes. Investors can choose to buy call options or put options depending on their expectations of the price trend of the underlying asset.

• When Expecting a Price Increase: A call option is ideal for taking advantage of an expected price rise in the future. The investor only needs to pay the option premium without assuming the full risk of buying the asset immediately.

• When Expecting a Price Decrease: A put option helps investors preserve the value of their assets in a declining market. This protects the investment portfolio from significant losses during a downturn.

• Speculating on Price Volatility: Investors can take advantage of market fluctuations by combining call and put options to implement speculative strategies while minimizing risk.

Both call and put options allow investors to adapt flexibly to market conditions.

Additionally, buying options can help investors better control their capital, as they only need to pay an initial premium to participate in the market. This is also a way to manage risk without owning the entire underlying asset.

Conclusion

Options contracts are derivative instruments that allow investors flexibility in managing risk and optimizing profits. Whether it’s a call option or a put option, each type plays a vital role in helping investors respond to price fluctuations in the market.

Open a derivatives trading account at SFVN to take advantage of opportunities from options contracts!