What is liquidity in stock options trading

Trading options - don't be afraid of simple futures

Do you want to hedge your portfolio or speculate on the development of prices? Then options trading like is appropriate. In addition, the conditions are transparent from the start.

However, most German investors are still reluctant to trade options. Even the term forward business gives many people the uneasy feeling that they are ultimately being ripped off in an opaque network of pitfalls.

Wrongly. Anyone who deals with the topic will quickly recognize the advantages. The fact that options are not advertised by the banks by no means makes them dubious.

On the contrary: the big financial institutions in particular have brought masses of complex problem products to the market in recent years. Many people have burned their fingers on securitized derivatives, i.e. certificates - often as a knock-out version. The banks have earned, investor confidence has been abused.

Trading options - clear conditions and transparency

Options trading, on the other hand, takes place on transparent terms. However, you have to know that losses cannot generally be ruled out here either. Investors must be informed about this by the bank or their broker. The knowledge of the risks is a prerequisite for the futures business ability with which he can then start trading with options.

Trading Options - Advantages

Options are conditional forward transactions and have a number of advantages: No price manipulation, no issuer risk, and the capital outlay is lower than with stocks, as they or the underlying asset are only traded indirectly. You can also use leverage and monitor the development of the underlying in both directions. With all of this, the buyer only has rights.

Trading Options - Rights Only, No Duty

That means: With options that are traded on a futures exchange, the buyer has the right to buy or sell a security, be it stocks, futures or currencies.

The price and duration are precisely determined beforehand. Everything is transparent. The bottom line: You can buy (call option) and sell (put option), but you don't have to.

As I said, this right relates to an underlying asset. So the investor does not buy any stocks directly. And that saves money in use. Instead of paying the full price for the securities, the buyer only pays who is called and agreed for the option.

Since, for example, in the case of stock options, a contract comprises at least 100 shares, the capital outlay is considerably lower than with a direct purchase. The first transactions can begin as soon as an account specifically designed for futures trading has been set up.

Options trading - index options popular

If you limit yourself to buying call or put options, no collateral is required. The most traded futures products include options on the DAX. Not all shares are physically transferred directly. Instead, there is a cash settlement between the buyer and seller of index options.

This depends on the base price of the option and the current index level. So if the DAX rises by 200 points with a cash value of € 5 per index point, you get paid € 1,000 for a DAX call.

As far as the terms are concerned, shorter deadlines are usually chosen because this usually means that the liquidity is higher. On the other hand: With a longer term, the chances are higher that the price will exceed the strike price. In general, liquidity plays a major role when trading options. When it comes to options, market makers are constantly competing for the best prices.

Options - A term that can be confused

By the way: Despite the ostensible similarity of terms, options should not be confused with warrants. Another variant are the binary options. Caution is advised here.

With the right strategy, money can be made in options transactions, but one should not underestimate the risk of the writer. > read more

© Verlag für die Deutsche Wirtschaft AG, all rights reserved