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Positions - Options Investing E-learning

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Now that you have learned how options work, discover how they can be used in practice. Learn about the financial performance (profit or loss) of the positions you can take when trading options. Understand the different payoffs of calls and puts and long and short positions.

What can options be used for?

Making a profit

Buyers of options expect a change in the price of the underlying value. The buyer of a call option generally expects a rise in the price, while the buyer of a put option may expect a fall. In both cases, the investor can make a relatively larger profit with options than by investing a similar amount in the underlying value, because only the option premium needs to be invested to benefit from price movements in the underlying value. This is known as leverage. If the price of the underlying value rises, the price of call options will usually rise as well. Similarly, if the price of the underlying value falls, the price of put options will usually increase. This makes it possible for investors to make a profit on their options.

Earning extra income

An investor can also decide to write options in order to receive the option premium. Investors who actually own the underlying value can obtain an additional return on their portfolios in this way (for example: sell a call option if you own 100 shares). However, if they are assigned to deliver the underlying value, they must sell the underlying value to the holder of the call option. When holders of put options exercise their rights, the writers have to buy the underlying value.

Protection against price falls

Options also allow investors to protect themselves against falls in the price of the underlying value. Maximum protection is obtained by buying put options. Writing call options gives investors partial protection against decreases in the price of the underlying value, but in this case protection is limited to the amount of premium received.

Fixing the purchase or selling price of the underlying value

Options also make it possible to fix in advance the price at which the underlying value may be traded at a future date. For example, an investor who wants to set a maximum purchase price will be interested in buying call options. An investor who wants to set a minimum selling price will be interested in buying put options.

Exposure to the full underlying value

When buying options, the investor is not initially required to pay the notional value of the contract, but just the premium, while exposure is on the full underlying value. In this way leverage is created. Investors pay a relatively small premium instead of investing a large investment by buying stocks, bonds or commodities.

Long call, buying call options

Buyers of call options can benefit from increases in the price of the underlying value during the lifetime of their options because they have the right to buy the underlying value at a fixed price.

Possibilities

If the price of the underlying value rises, the options holder must take steps to realise the profit on the option. There are two possibilities:

  • The options holder can sell their options on the derivatives market. The holder’s objective in this case is normally to benefit from the increase in the option premium instead of acquiring the underlying value. In general, the price of a call option increases in line with the price of the underlying value. The profit in this case consists of the proceeds from the sale, less the original option premium and transaction costs paid. Because of leverage, a small rise in the price of the underlying value can generate a high profit (in percentage terms) on the original investment, and vice versa.
  • Options holders can exercise their options. Remember that American-style options can be exercised at any time during the lifetime of the option, while European-style options can only be exercised on the expiration date. Depending on the specifications of the option, either the underlying value is delivered when the option is exercised, or settlement takes place in the form of cash.

Risk – Maximum loss

If there is no increase in the price of the underlying value, call option holders can lose their entire investment, i.e. the option premium plus the transaction costs. This is the maximum possible loss that buyers of call options can incur.

Short call, selling call options

Sellers of call options take on the obligation to sell the underlying value at the exercise price, if assigned to do so. In return, they receive the option premium.

Possibilities

Selling covered call options

The main objective for investors who sell call options on an underlying value which they own (covered call options) is to obtain an extra return on their investment portfolio by receiving the option premium. A consequence of this is that the investor must accept the risk of having to sell the underlying value at the strike price. If the price of the underlying value falls below the strike price, the option may expire without being exercised and the option seller will retain the premium. The seller can also liquidate a position through a closing buy transaction on the derivatives market. However, if the price of the underlying value rises above the exercise price, there is a good chance that the call option will be exercised. The seller will then be required to deliver the underlying value. In addition to earning income from the option premium, investors may decide to sell call options as a means of fixing a selling price for the underlying value. The selling price is then equal to the strike price plus the premium received, less costs. If the option is not exercised, the investor does not have to sell the underlying value.

Selling naked call options

Investors who sell call options on underlying values which they do not own (naked call options) should be aware that they run a potentially unlimited risk. If the price of the underlying value rises above the exercise price, there is a good chance that the call option will be exercised. Option sellers will then be required to sell the underlying value at the exercise price. Because sellers of naked call options do not own the underlying value, they will have to buy it first at the market price, which will be higher than the exercise price. The increase in the price of the underlying value can, in theory, be unlimited, which means that the seller of a naked call option runs an unlimited risk. Sellers of naked call options must therefore have the financial means to purchase and deliver the underlying value if the option is exercised. To guarantee this, they have to provide an amount of margin.

Risk – only suitable for experienced investors

Because of the large losses which may be incurred, selling call options is only suitable for experienced investors who have the financial means to sustain such losses. The extent of the seller’s risk depends largely on whether the options are covered or naked. Sellers must therefore provide collateral. If the options are covered, the underlying value is held as collateral. If the options are naked, margin must be deposited. Sellers of call options (covered or naked) who expect to be required to deliver the underlying value because of a rise in its price may be able to avoid delivery by concluding a closing buy transaction on the derivatives market before being assigned to make the delivery.

Long put, buying put options

Buyers of put options can benefit from a price drop in the underlying value which may occur during the lifetime of their options.

Possibilities

If the price of the underlying value falls, put option holders who wish to profit from this price movement can choose between the following alternatives:

  • The options holder can sell their options on the derivatives market. In this case, the profit consists of the increase in the option premium. In general, the price of a put option increases as the price of the underlying value falls. The profit consists of the proceeds from the sale, less the original option premium and transaction costs paid. Because of leverage, a small fall in the price of the underlying value can generate a high profit (in percentage terms) on the original investment.
  • Option holders can exercise their options. Remember that an American-style option can be exercised at any time during the lifetime of the option. A European-style option can only be exercised on the expiration date. Depending on the option specifications, the underlying value is delivered when the option is exercised, or settlement takes place in the form of cash.

Risk – Maximum loss

If there is no fall in the price of the underlying value, or if the price of the underlying value increases, put option holders can lose their entire investment (i.e. the option premium plus the transaction costs). This is the maximum possible loss that buyers of put options can incur.

Short put, selling put options

Sellers of put options take on the obligation to buy the underlying value at the exercise price, if assigned to do so. In return, they receive the option premium.

Possibilities

The main objective of investors who sell put options is to receive the option premium. A consequence of this is that the investor has to accept the risk of having to buy the underlying value at the strike price. If the price of the underlying value rises above the strike price, the option may expire without being exercised and the seller will retain the premium. As long as the option has not been exercised, the seller can liquidate the option position with a closing buy transaction on the derivatives market. However, if the market price of the underlying value drops below the strike price, the put option may be exercised. The seller will then be required to buy the underlying value at a price that is higher than the current market price. In addition to making a profit on option premiums, the investor may also consider selling put options as a means of fixing a purchase price for the underlying value. The purchase price is then equal to the strike price, less the option premium, plus costs. If the option is not exercised, the underlying value will not be delivered and the investor will keep the profit earned on the option.

Risk

The seller of a put option accepts the risk of having to buy the underlying value at a price that is substantially higher than the current market price. A sold put option is always naked. The investor must therefore have the financial means to pay for the underlying value in the event that the option is exercised, and hence has to provide the margin. Sellers of put options who expect to have to take delivery of the underlying value because of a fall in its price can avoid doing so by concluding a closing buy transaction on the derivatives market before being assigned.

Option buyers and sellers: the transfer of risk

Each derivatives contract involves a buyer and seller. They are (indirectly) each other’s counterparty. What one party makes on the contract is lost by another party. No value or wealth will be created by the deal itself. Trading in derivatives will only result in the transfer of risk or financial result.

There are risks involved in buying and selling options. Investors should not buy options unless they can afford to lose the premium they have to pay. Nor should they write naked options if they are not in a position to sustain a substantial financial loss.

 

R18739 - Relationship Management Intern

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R17607 - Commercial Analyst

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Submitted by master_of_puppets1 on

Euronext is a European exchange group operating regulated markets in Belgium, France, Ireland, the Netherlands, Norway, Italy and Portugal. Euronext also operates non-regulated activities in 16 countries across the world. We are the leading European listing and trading venue with some €6 trillion combined market capitalization, accounting for a quarter of all European equities trading.

Cogefeed lists on the professional segment of Euronext Growth Milan

Launch of Euronext Access in Dublin: supporting the ambitions of Irish scale-ups and SMEs

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We are pleased to announce the launch of the Euronext Access market in Dublin, aimed at supporting the growth of Irish scale-ups and SMEs. This market will provide a simplified and flexible listing process to enhance visibility and attract investors for Irish businesses.

Euronext Access Dublin, a simplified path for Irish scale-ups and SMEs to go public

With over 170 companies listed and a combined market value of €12 billion, Euronext Access provides an ideal platform for growing scale-ups and SMEs looking to raise capital and increase their global profile. 

Offering a simplified and flexible listing process, Euronext Access is a straightforward entry into the public market, especially for companies not yet eligible for Euronext's regulated markets or Euronext Growth (see below ‘Eligibility criteria tab’). This listing venue, with less stringent admission requirements, opens valuable opportunities to secure financing and build market credibility.

By joining this platform, companies gain the reputational advantages of being publicly traded while positioning themselves for future growth. 

With this market, Euronext Dublin supports Irish scale-ups and SMEs in navigating the financial landscape, providing not only vital access to capital but also a genuine path to more advanced markets, including Euronext Access+ and Euronext Growth.

Some of the key benefits include: 

  • Alternative funding: Ideal for capital raises under €10 million, attracting retail and institutional investors.
  • Employee shareholders: Maintain a trading market for staff and implement attractive Save-As-You-Earn (SAYE) schemes.
  • Simplified access: Benefit from structured trading opportunities with twice-daily auctions.
  • Family businesses: Support succession planning with low liquidity requirements.
  • Springboard potential: Currency for acquisitions and suitable for companies aiming to raise funds at a later stage. 

Euronext Access Dublin brochure

A dedicated brochure designed to help you understand Euronext Access market and how it can support the growth of Irish businesses.

 

slide show
 

Download The Euronext access brochure

Eligibility criteria tab 

  Euronext ACCESS® Euronext ACCESS+® Euronext GROWTH® Euronext®
  Simplified access to market Dedicated to high profile small caps Specifically designed for SMEs large & mid-caps with international business
Free float
Not applicable
≥€1m
10% 
(5 institutional investors)
€1m
Financial statements
2 years 
2 years 
(audited for last year)
2 years 
(audited)
3 years
(audited)
Accounting standards
IFRS or local GAAP
IFRS or local GAAP
IFRS or local GAAP
IFRS for consolidated accounts
Intermediary
Listing Sponsor
Listing Sponsor
Listing Sponsor 
Listing Agent 
Main document to be provided
• For a Public Offer >€8m: EU Prospectus
• Information Document
• For a Public Offer >€8m: EU Prospectus
• Information Document
• EU Growth Prospectus
EU Prospectus

Get in touch

Niall Jones
  

Niall Jones, Head of Listing – Ireland & UK
njones@euronext.com 

Vantage Drilling lists on Euronext Growth Oslo

Second edition of Euronext Women in Trading

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On 17 October 2024, Euronext organised the second edition of ‘Women in Trading’, an event bringing together women from the finance sector to provide them with insights into industry trends, business lead opportunities from the sell-side and the buy-side communities and a place to foster sharing, learning and networking opportunities.

Over 80 participants attended the evening event at the Fondation Simone et Cino Del Duca in Paris. 

2nd edition of Euronext Women in Trading
2nd edition of Euronext Women in Trading

Stéphane Boujnah, CEO of Euronext & Chairman of the Managing Board kicked off this second edition. 

Charlotte Alliot, Group Head of Institutional Derivatives took the stage next, followed by two special guest speakers: Patrizia Bussoli, Economist, Founder and Partner of Bea Finance SCF and Emmanuelle Assouan, Director General of Financial Stability & Operations at the Banque de France and Chair of the Banque de France's Climate Change Center. 

They discussed macroeconomic trends in changing political contexts, the challenges of financial stability, and what needs to be done to further close the gap in women's representation in finance.

Throwback to the second edition of Euronext Women in Trading


Interview of Delphine d'Amarzit


Interview of Charlotte Alliot

 

Interview of Emmanuelle Assouan

 

Interview of Patrizia Bussoli

Look back to the first edition of Euronext Women in Trading

The previous edition was organised in partnership with Equileap, the leading data provider for gender equality and diversity & inclusion. Together with Equileap, Euronext launched the Euronext® Equileap Gender Equality Indices.

Discover the first Euronext Women in Trading

 

 

What is a short put option?

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Options strategies – short put
Benefits, risks and examples of a short put option.

The short put option strategy can generate income in stable or rising markets. This article explores the fundamentals of the short put option strategy, including its mechanics, benefits, risks, and practical implementation.

What is a put option?

A put option is a financial contract that gives the holder the right, but not the obligation, to sell a specified quantity of an underlying asset at a predetermined price (the strike price) within a set period. The buyer of the put option pays a premium to the seller (writer) for this right. 

In return the seller of the option has the obligation to buy, upon the request of the buyer, a specified quantity of an underlying asset at a predetermined price (the strike price). This strategy is known as a short put option. 

Both buyers and sellers of put options can terminate either their right or obligation by a reverse (closing) transaction.

Understanding the short put option strategy

A short put option strategy involves selling (writing) put options with the expectation that the underlying asset’s price will either remain stable or increase. This bullish to neutral strategy allows the investor to profit from the premium received for selling the put option. If the option expires worthless, the seller keeps the entire premium.

Key components of a short put option

  1. Premium
    The price received by the seller for writing the option.
  2. Strike price
    The predetermined price at which the buyer can sell the underlying asset.
  3. Expiry date
    The date by which the option must be exercised or will expire worthless.

Advantages of the short put option strategy

  1. Income generation
    The primary benefit of selling put options is the immediate income received from the premium. This can provide a steady stream of income if executed regularly and successfully.
  2. High probability of success
    In stable or rising markets, many short put options expire worthless, allowing the seller to keep the premium. This can result in a high probability of success.
  3. Flexibility
    The strategy can be tailored by choosing different strike prices and expiry dates, allowing the seller to adjust their risk and reward profile.
  4. Stock acquisition
    If the option is exercised, the seller acquires the stock at the strike price, which may be desirable if the stock is undervalued.

Risks of the short put option strategy

  1. Substantial risk
    The most significant risk is the potential for substantial losses if the underlying asset’s price falls significantly below the strike price. This makes risk management crucial.
  2. Margin requirements
    Selling put options typically requires a margin account, and the margin requirements can be substantial, especially if the stock price moves against the position.
  3. Opportunity cost
    If the underlying asset appreciates significantly, the seller misses out on potential gains and faces losses if they are obligated to purchase the stock.

Example of a short put option

Suppose you believe Company XYZ’s stock, currently trading at €50, will not fall below €45 over the next three months. You decide to sell a put option with a strike price of €45 expiring in three months. You receive a premium of €2 per share (options typically represent 100 shares, so the total premium received would be €200).

Euronext Options strategies – short put
  

Profit and loss potential of a short put option

  • Maximum profit
    The maximum profit is limited to the premium received. In this example, the most you can make is €200 if the stock remains above €45 until expiry.
  • Breakeven point
    The breakeven point occurs when the stock price equals the strike price minus the premium received. In this case, the breakeven price would be €43 (€45 strike price – €2 premium).
  • Potential loss
    If the stock price falls significantly below the strike price, the potential loss can be substantial. For example, if XYZ’s stock drops to €30, the loss would be (€45 – €30 – €2) x 100 = €1,300. As the stock price would not drop below €0 the loss is maxed at €4,300. 

Implementing the short put option strategy

  1. Market analysis
    Conduct thorough market analysis to identify stocks or assets expected to remain stable or appreciate in value. This can involve technical analysis, fundamental analysis, or both.
  2. Select the strike price and expiry date
    Choose a strike price that reflects your market outlook and an expiry date that aligns with your expectations for the stock’s movement.
  3. Monitor the position
    Regularly review the position and market conditions. Be prepared to take action if the underlying asset’s price moves significantly.
  4. Exiting the position
    Have a clear plan for exiting the position. This can involve buying back the put option to close the position if the stock price falls or letting the option expire if the price remains above the strike price.

Short put vs. other strategies

The short put option strategy is often compared to other strategies like covered puts, short calls, and long put options.

Versus covered puts
A covered put involves selling put options while shorting the underlying stock, which can limit the risk compared to a naked short put. However, it also requires a more significant capital outlay and carries its own risks.

Versus short calls
A short call profits from neutral to declining prices and carries unlimited risk if the stock price rises. In contrast, a short put profits from stable or rising prices and has limited risk (albeit potentially substantial).

Versus long put options
A long put benefits from price declines and has limited risk (the premium paid), while a short put profits from price stability or increases but carries substantial risk if the price falls significantly.

Practical tips to increase the possibility for success

  • Risk management
    Given the substantial risk, it’s crucial to have robust risk management strategies in place. This can include setting stop-loss orders, using options spreads, or limiting the size of positions.
  • Use technical indicators
    Indicators such as moving averages, support levels, and volatility indices can help identify potential entry points and manage positions.
  • Stay informed
    Keep abreast of market news, earnings reports, and other factors that can influence the underlying asset’s price.
  • Diversify
    Spread your positions across different assets to mitigate the impact of adverse price movements in any single asset.
  • Regular review
    Continuously monitor and adjust your positions based on market conditions and new information.

The short put option strategy can be a powerful tool for generating income in stable or rising markets. However, it carries substantial risks, especially if the price of the underlying asset falls significantly. By understanding the mechanics, benefits, and risks, and by implementing this strategy with careful market analysis and robust risk management, investors can potentially achieve consistent returns. As with any investment strategy, thorough research and prudent decision-making are essential for success in options trading.

Investing in the financial markets requires a deep understanding of various strategies to maximise returns while managing risk. Please consult your bank or broker for advice or read the Key Information Document for the financial instrument you are considering investing in to get a better understanding of all risks and costs involved.


See also

Argeo transfers to Euronext Oslo Børs