Options and Other Derivatives

Since the creation of the Chicago Board of options on 1973 (Former Chicago Board of trade or CBT), the options and other derivatives have been performing each time a more important role in the financial market.

A derivative can simply be defined as a financial contract whose value is derivative from the changes of prices experimented by a security, a financial tool or a product. Derivative is the options over shares, the options over types of interest (bonds), The options over an index, and the options over foreign currency and, has course, the futures over products or raw materials.

According to the intentions that the investor has, the options are used in several ways. As a general rule, an investor (big or small) of conservative manners will use the options to ensure its security portfolio and also to increase the income generated by it. On the contrary, a speculative person will buy options with the hope of obtaining a sudden high benefit propitiated by a quick and substantial variation of the price from that product which the option is derived.

For example, the buyer of an option obtains, for a determine period of time, the right (but not the obligation) to buy or sell (depending on the type of option you acquire) at a fixed price 100 ordinary shares from a company. An option doesn’t give any kind of property over the shares, only the capacity of controlling as specific number of participations during a stipulated period of time.

The option contracts can be of two types. The acquirer of a call option (buying option) has the right to buy 100 ordinary shares from a company at a given price and for a limited period of time, the acquirer of a put option (selling option= has the right to sell 100 ordinary shares from a company at a given price and also for a limited period of time.

If you believe that in the future the price of the ordinary shares of a company are going to rise, you would have to acquire a call option over these shares. This call options would give you the right to buy them in a future at a prefixed price. Of course, you would exercise your right of buying them at a higher price.

The contrary would be, if you believe that in the future the quotation of these ordinary shares of a company would drop, then it would be interesting to acquire put options over these shares.

These types of options gives you the faculty of selling the shares at the highest price established before hand during a specific period of time. The option would only be exercised in the assumption that the shares could be bought at a lower price.