Have you already read our page 'What are options?’ Here you can find general explanations about options. Our page with terms that are used when investing in options is also useful.
"}},{"componentType":"paragraph","title":"There is a lot of information in the name.","richBody":{"value":"How do you know when an option expires? And what the exercise price of an option is? This information is shown in the name of the option and therefore also in the price quote. An example of an option quote is:
C AEX 450 FEB 2018
C
C stands for call. You are dealing with a call option. The other possibility is P for a put option.
AEX
This shows the underlying value of the option, in this case the AEX index. An abbreviation is often used to keep the quote short. For example, the share Arcelor Mittal has the abbreviation MT and Royal Dutch Shell is shown as RD.
450
This number shows the exercise price, in this case the level of the AEX. For this option, the value is zero if the AEX is at 450 or lower.
FEB 2018
This shows the month and year in which the option expires. In this case, the third Friday of February 2018.
Week and day options
Day and week options are shown with the week number of the current month or the day number of that month. For example, AX2 is the week option for the second week of the current month of the AEX. No week options are issued for the third week of the month, because option series already expire on the third Friday of every month.
Price quote
When you buy an option, you take on an obligation for (usually) one hundred times the underlying value. The price is always shown per unit of the underlying value. You therefore always pay (or receive, if you ‘write’ options) the price × 100. If the price of an option is €5.30, you pay €530 for one option contract (excluding transaction costs).
Example: it is 3 June 2017 and the AEX level is 451. You buy the following AEX option: AEX C 450 JUL 2017. The price at that moment is €4.25. The intrinsic value of the option is €1. The AEX level of 451 is 1 AEX point higher than the exercise price of the option (450). And for AEX options: 1 point is 1 euro (times the fixed contract size of one hundred). Still, you have to pay €4.25. Why?
Option price moves closer to the underlying value The expiry of the option in our example is on the third Friday in July 2017. There is still more than one and a half months to go before the option expires. A lot can happen in that time; the price can increase or decrease. Nobody knows exactly what will happen.
This uncertainty is translated into a price that in this case is €3.25 on top of the intrinsic value of €1. This difference is the time and expectation value. Normally, this value decreases as time passes, and the price moves more towards the intrinsic value. It is good to look at this time and expectation value. To what extent are you willing to pay this ‘extra’ price?
Volatility: how much does the price move?
A factor that strongly affects the time and expectation value is the movement of the prices. We call this volatility. In the example above, you buy the option at a price of €4.25. It was a calm period on the stock market at that moment. Afterwards, events in the world caused big movements in the market.
In our example, we now move to 1 July, during this period of uncertainty. The AEX price has, after many movements, returned to 451, but the premium for the same option is now €6.50. What happened? Because of the strong price movements, the expectation value increased. Investors became nervous because of all the movement (“what else is coming?”) and were therefore willing to pay a higher price for this option.
"}},{"componentType":"paragraph","title":"Buy or sell?","richBody":{"value":"You can buy an option or sell one. What happens if we do this in the scenario from our example?
1. You buy a C AEX 450 JUL 2017 option: in theory your maximum profit is unlimited.You expect an increase in the AEX from 451 points and you pay 100 × €4.25 = €425 for the option. To get back the amount you invested, the AEX must be higher than 454.25 on the expiry date. You calculate this by adding the premium of 4.25 to the exercise price of 450, excluding transaction costs. Below you can see the possible outcomes at different AEX levels.
| AEX | The paid premium | Value of the option on the expiry date | Total result |
|---|---|---|---|
| 449 | - €425 | €0 | - €425 |
| 450 | - €425 | €0 | - €425 |
| 451 | - €425 | €100 | - €325 |
| 455 | - €425 | €500 | €75 |
| 460 | - €425 | €1.000 | €575 |
| 465 | - €425 | €1.500 | €1.075 |
| 470 | - €425 | €2.000 | €1.575 |
(Example calculation excludes costs. Source: ING April 2017)
Conclusion: maximum €425 loss, but your potential profit is in theory unlimited. The higher the level of the AEX on the third Friday of July 2017, the higher your return.
2. You write a C AEX 450 JUL 2017 option: your maximum profit is €425.
You expect that the value of the AEX will not increase above 450, and that is why you write the call option. You receive €425. What possible outcomes can you expect?
| AEX | The received premium | Value of the option on the expiry date | Total result |
|---|---|---|---|
| 449 | €425 | €0 | €425 |
| 450 | €425 | €0 | €425 |
| 451 | €425 | €100 | €325 |
| 455 | €425 | €500 | - €75 |
| 460 | €425 | €1.000 | - €575 |
| 465 | €425 | €1.500 | - €1.075 |
| 470 | €425 | €2.000 | - €1.575 |
(Example calculation excludes costs. Source: ING April 2017)
"}},{"componentType":"paragraph","title":"Closing a short position?","richBody":{"value":"Your profit from the option is a maximum of €425, which is the premium you received. Your possible loss is, in theory, unlimited and depends on the value of the AEX. The higher the value, the more loss you will have. You must buy back the option you wrote (sold) for the value it has on the expiry date. You can, of course, buy it back earlier if you want.
"}},{"componentType":"paragraph","title":"Effect of transaction costs on the return","richBody":{"value":"In both examples, transaction costs are not included. These affect your return. Read more about the transaction costs of options.
"}},{"componentType":"paragraph","title":"Responsible investing with options","richBody":{"value":"Below are some examples of how you can use options in a responsible way.
1. As extra return on shares
A well-known way to use options is to combine them with the underlying value, usually shares. You use the shares as cover for the risk you take with options.
You sell options
Imagine you own 300 shares X. The value on 03/06/2017 is €9.90 and you expect little increase in value in the coming months. How can you use options? You can use them to make extra return. You have 300 shares as underlying value, so you can enter into 3 option contracts (each contract is 100 units). You can write 3 call options. You choose, for example, the option C X AUG 2017 10.40. You receive a premium of €0.70 per option.
What is the result of this transaction
Rolling forward or not?
We continue with the example. It is now the third Friday of August 2017 and the value of share X has increased to €10.30. For you this is an ideal situation. You can probably keep the option premium and the value of your share has increased. You can now do the following:
2. Buying shares at a discount
Imagine it is 03/06/2017 and you want to buy 300 shares X. The value is €9.90 and you think this is a good price to start. You can buy the shares at this value on the market. Another choice is to write three put options and buy the shares later at a discount. You write 3 put options August 2017 with an exercise value of €9.90. You receive €1.80 (3 x €0.60) times one hundred. In total you receive €180. What is the result of this transaction?
It can also turn out badly…Imagine the value of share X increases strongly and is suddenly €16 in August. Your written put option expires worthless, but you have missed the huge increase in value. In that case, it would have been better to buy the shares immediately in early June.
If the value had decreased strongly to, for example, €6, then the buyer of your put option will hold you to the buying obligation: buying 300 shares X at €9.90. You will do this reluctantly because of the market value. But remember you were already planning to buy the shares for this value. At least you have received the option premium which reduces your loss somewhat.
3. Protection of your share portfolio
Trading in options can be very risky, but you can also use options to protect your share portfolio. Imagine you own 100 shares X. At a value of €9 they are worth €900. By buying a long-term put option on share X with an exercise value of €8, you know you can get at least €800 (100 x €8) for these shares until the option’s expiry date.
By buying the put option, you have the right to sell your shares for €8. If the value increases instead, your option expires worthless and you lose the option premium. But you have had insurance against a possible large loss in value of your shares for a relatively small amount.
It is important that you understand the risks of options well before you start investing in them. Read the risks of options carefully
"}},{"componentType":"paragraph","title":"Good to know","richBody":{"value":"Investing comes with risks and costs. You can lose (part of) your deposit. Read more about the risks of investing and how you can reduce them.
*For informational purposes, we will use the name Self Invest. The actual product name, which will also appear in the onboarding flow and on your bank statements, is Zelf op de Beurs. This translation is intended for the customer’s convenience only. In the event of any inconsistency between the English translation and the original Dutch version, the original Dutch version shall prevail.
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