OPTIONS AND FUTURE

Hedging vs Speculation

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TABLE OF CONTENTS

Derivatives 4

Options 5

Futures 13

Options vs Futures 18

Next steps – Start trading with Swissquote 19

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DERIVATIVES OPTIONS

1. CONCEPT 1. CONCEPT

What is a derivative instrument? What is an option?

Derivatives are financial instruments whose pay-off is reliant on the future An option is a derivative instrument which gives the holder the right, but not the obligation,
realization of a reference variable or a basket of references. Hence, their value depends on to buy or sell an underlying asset at a specified price throughout a limited period of time.
another asset or a basket of assets, called «underlying».

Depending on the strategy used, derivatives can serve as instruments to hedge a position, or What are the different exercise style of options?
speculate on the future variation of the underlying asset.
1 American options 2 European options
American options give owners the European options give owners the
MOST COMMON UNDERLYING ASSETS right to exercise the option at any right to exercise the option only
time before the expiration date. when the expiration date comes.

What are the different types of options?

Stocks Bonds Indexes A call option enables the owner to BUY the underlying
Call asset over a specified period of time.
Option
A put option enables the owner to SELL the underlying
Put asset over a specified period of time.
Interest rates Currencies Commodities

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 2. KEY CHARACTERISTICS

Buyer’s vs seller’s perspective

The price (S) – As shown earlier, the underlying
THE UNDERLYING
asset associated with option contracts may vary
ASSET
from stocks to bonds to indexes, among others.

OPTION BUYER OPTION SELLER

The strike price (X) – The exercise price, or
OBLIGATION Right Obligation EXERCISE strike price, corresponds to the price at which the
OR RIGHT The buyer of the option The seller, however, has the
PRICE underlying can be bought or sold when the option is
exercised.
has the right, but not the obligation to sell (in case
obligation, to buy (in case of a call) or buy (in case
of a call) or sell (in case of of a put) the underlying
a put) the underlying asset asset at the specified price The maturity date (T) – The expiration date, or
at the specified price over a when the buyer decides to EXPIRATION maturity date, represents the last day on which the
defined period of time. exercise his option. DATE option can still be exercised. Over that date, the
option is said to be expired.
If he wants to, the buyer can Indeed, this is a legal
also decides not to exercise obligation, which means
his option, which will then that the seller cannot
expire worthless. retract. The price of the option (C/P) – The premium
corresponds to the current market price of the
OPTION
option contract. In other words, this is the price
PREMIUM
investors have to pay to get the benefit associated
PRICE Price Proceeds
with this contract.
OR PROCEEDS To be able to benefit from On his side, the seller
this right, the option buyer receives the option’s
must pay the seller a specific premium from the buyer
Call vs Put – Depending on the strategy, as well as
amount of money called as a credit.
«premium».
OPTION the convictions regarding the future movements of
TYPE the underlying asset, investors have the opportunity
to buy or sell both call and put options.

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3. PROFIT DIAGRAMS

Position: (buy) long call Position: (sell) short call

Profit Profit

+C
Positive Positive profit X+C
X X+C profit

X Underlying price
Underlying price
-C

As can be seen, an investor with a long call position enters in the positive As can be seen, an investor with a short call position is in positive profit
profit zone whenever the price of the underlying security goes beyond zone if the price of the underlying security remains below the sum of
the sum of the option’s premium and the strike price (S > X + C). the option’s premium and the strike price (S < X + C).

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3. PROFIT DIAGRAMS

Position: (buy) long put Position: (sell) short put

Profit Profit

+P
Positive profit

Positive X-P X Underlying price

profit X-P X

Underlying price
-P

As can be seen, an investor with a long put position is in the positive profit As can be seen, an investor with a short put position enters in the
zone if the price of the underlying security remains below the strike price positive profit zone whenever the price of the underlying security is
minus the option’s premium (S < X - P). above the strike price minus the option’s premium (S > X - P).

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 FUTURES

4. ADVANTAGES & DISADVANTAGES 1. CONCEPT

Advantages What is a futures contract?

A futures contract is a legal agreement between a buyer and a seller to buy or sell
1 Risk/Reward profile
an underlying asset at a defined price at a specified date in the future.
When used efficiently, options give traders the opportunity to earn substantial returns
from relatively small variations in the price of the underlying asset.
Futures are standardized in terms of quality and quantity, allowing the trading on
dedicated exchanges.
2 Leverage
Options allow investors to take huge positions with low initial capital requirements.
Buyer’s vs seller’s perspective
3 Hedging possibilities
While sometimes used as speculation tools, options can also be part of hedging
strategies. Investors can then reduce portfolio exposure to the risk of significant drop
in prices, by taking a position in the option market which is inversely correlated to the
targeted stock market position.
FUTURES BUYER FUTURES SELLER

Disadvantages OBLIGATION Obligation Obligation

The buyer of the futures On his side, the seller of the
contract has the obligation futures contract has the
1 Ownership benefit to buy the specified quantity obligation to sell the agreed
By taking a position in the option market, investors do not enjoy any benefit of underlying asset at the quantity of underlying asset
associated with ownership (dividends, votes…). defined date. at the expiration date.

2 Expiration date Margin and daily cash settlement

COST OR
Option’s holders have limited time to benefit from the option’s potential, before it can
become entirely worthless.
PROCEEDS A margin requirement to open positions is requested.
In a daily settlement, your net profit or loss is automatically
3 Liquidity reflected in your margin account based on the settlement
For many individual stock options, trading volumes can be low, reducing the liquidity price at the end of every trading day.
of such instruments.

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2. CHARACTERISTICS 3. PROFIT DIAGRAMS

Futures contract Position: (buy) long futures

STANDARDIZED EXCHANGE-TRADED TRADED ON MARGIN Profit

To facilitate trading on Futures contracts are Futures contracts are

dedicated exchanges, traded on futures traded on margin, which
futures contracts exchanges, wherein means that investors must
are standardized, different types of futures first deposit a certain
in terms of quality can be bought and sold amount with a broker Positive
(standard deliverable daily. before being able to open Futures profit
grade), quantity (size of Futures exchanges play the
a futures position. price
contracts), and delivery role of clearer and settler, Margins usually represent
options (physical delivery providing traders with a percentage of the total Underlying price
vs cash settlements, more «safety» than the contract value (typically,
delivery location, etc). OTC market. 2%-10%).

Margin account balance

As can be seen, an investor with a long futures position enters in the
positive profit zone whenever the price of the underlying security is
Removal above the agreed futures price.
Initial
margin

Initial Addition
margin
Maintenance
margin

Ma Margin call
margin

1 2 3 4

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3. PROFIT DIAGRAMS 4. ADVANTAGES & DISADVANTAGES

Position: (sell) short futures Advantages

Profit 1 Low margin

Usually, futures contracts offer a relatively low-cost profile, since the commission
charged for futures trading are small when compared to some other type of
instruments.

2 Liquidity
Positive Most futures markets provide investors with a comfortable level of liquidity, particularly
profit when trading commodity / indexes futures.

3 Hedging possibilities
While often used as speculation tools, there are also very efficient hedging strategies
Futures Underlying price to be built on futures contracts. Indeed, it is often the case with commodity futures,
price which serve as useful tools for reducing exposure to the risk of, for example, oil or corn
price fluctuations.

Disadvantages

As can be seen, an investor with a short futures position is in the

positive profit zone if the price of the underlying security remains 1 Leverage risk
below the agreed futures price. Investors must be very careful when trading futures with high leverage, which can lead
to very rapid changes in futures prices.

2 Partial hedge
Since futures contracts are standardized products with fixed terms, investors can often
only hedge part of their portfolio.

3 Lack of control over unexpected events

Unexpected events such as natural disasters or geopolitical conflicts can cause
significant disruptions in the future market.

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OPTIONS VS FUTURES NEXT STEPS –
START TRADING WITH SWISSQUOTE
1. KEY DIFFERENCES
Why trade with Swissquote?
1
OPTION FUTURES
Go to swissquote.com/trading • 25 years of online trading expertise

OBLIGATION Right Obligation • Access to 3 million products on major

2 international stock exchanges
OR RIGHT Options give the buyer On the contrary, the
the right, but not the buyer / seller of a futures Open a demo account. • Most comprehensive trading platform on
obligation, to buy or sell contract is legally the market
the underlying asset. forced to buy / sell the
3 • Multilingual customer support
underlying asset.
You can practice trading • Training and education with online webinars
with CHF 10'000 virtual money.
STRIKE Written in the contract Set by supply/demand No risk & no obligation. • High-performance mobile applications
PRICE The strike price is specified The delivery price depends
• International Group listed on the
at time 0 and is written on the supply and demand Try a demo now! SIX Swiss Exchange (SIX:SQN)
within the contract. It for the underlying asset,
cannot be changed over and therefore is not known
the life of the option. in advance.

Upfront Margin requirement

Swissquote is regularly quoted and consulted
PRICE OR
PROCEEDS The buyer pays the seller Initial margin, mantenaince
by global financial media.
an upfront payment called margin and daily cash
«premium». settlement.

LOSS Limited Unlimited

POTENTIAL The maximum loss is the There is no limit to the
price paid for the option if potential loss incurred.
you are a buyer. If you are a
seller, the risk is unlimited.

05 – 21 | EN
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