Derivatives
Updated: September 28, 2024
Derivatives are options, futures, forwards, swaps, mortgage-backed securities & more.
A derivative’s price is intrinsically linked to the price of something else.
‼️ This information is for learning and should not be considered financial advice.
‼️ This page is not operated by a financial advisor. Use information at your own risk.
Table of Contents
OPTIONS
On US Exchanges Option Contracts move in 100 share quantities. Options cost money known as Premium. Therefore, Premium is multiplied by 100 in cost. Think of Premium as a down payment for a Call or an insurance policy for a Put. People who buy options are called holders and those who sell options are called writers.
- Holders pay a Premium and receive a right. Max loss is Premium.
- Writers receive a Premium and has an obligation. Max loss in some cases unlimited.
Contract = Stock Ticker - Expiration Date - Excercise Price - Option Type @ Premium
XOM July 30, 2002 92 Call@1.37
Call
- Gives a holder the right to buy a stock.
- Gives a writer the obligation to sell a stock.
- Long Call - Buying a call option gives you a potential long position betting the stock will go up.
- Short Call - Selling a naked call gives you a potential short position betting the stock will go down.
Put
- Gives a holder the right to sell a stock.
- Gives a writer the obligation to buy a stock.
- Long Put - Buying a put option gives a potential short position betting the stock will go down.
- Short Put - Selling a naked put gives a potential long position betting the stock will go up.
Covered Stock
- The trader already owns the asset and writes a call or put for that asset.
Short
- Naked Short - Selling a stock without having possession of it. (Illegal in the US)
- Covered Short - Borrowing a stock on margin/brokerage with sell to open | buy to close.
Straddle
- Simultaneously buying/selling a put & call option with the same strike price and expiration date.
- Long Straddle - used with hopes of drastic change in price.
- Short Straddle - earns a return when pricing stays stable or moves in a narrow range.
Strangle
- Hold a position in both a call and a put in same stock and expiration date but at different strike prices.
- Long Strangle - used with hopes of drastic change in price.
- Short Strangle - earns a return when pricing stays stable or moves in a narrow range.
Butterfly
- Strategy with either three calls or puts with a ratio 1-2-1 with a fixed risk and capped profit.
Iron Butterfly
- Combine two calls and two puts spread over three strike prices all with same expiration date.
- Long Strangle - aims to profit with significant price changes.
- Short Strangle - earns a return when prices are stable.
Condor
- Long Condor - Make profit when stock prices are expected to be stable.
- Short Condor - Earns when a return when prices are expected to rise or fall significantly.
Iron Condor
- Combine two calls and two puts pread over four strike prices all with the same expiration date.
- Long Strangle - aims to profit with significant price changes.
- Short Strangle - earns a return when prices are stable.
Collar
- Strategy to protect against large losses. Used in a long term with short term uncertainty.
Vertical
- Simultaneously buying/selling all calls or all puts of the same stock, with the same expiration date at various strike prices.