I understand that some of my colleagues, in the finance industry find it challenging to pass the regulatory exam, M9A.
Thus, I will like to make a small contribution here. I will be writing a few blog posts, to help explain in a simple, easy to understand manner, concepts that you need to know, when you undertake the M9A exams. If you find it helpful, do share my blog post around! 🙂
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In this blog post, I’m going to share more about buying a derivative instrument called options. 🙂
Most of us are familiar, that when we first get married, and want to buy a BTO house, we paid $2000 to “reserve” the house. This is an example of buying a “call option”.
When you buy (long) a call option, you attain the right but not the obligation to BUY the underlying assets (house) at specified price (strike price), within a specific period of time.
That $2000 that you paid, gives you the right but not obligation to buy the house. That $2000 is also known as the option’s “premium”.. Nobody else can buy your house, only YOU can buy the house, until the option expires.
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In the real world, people buy a call option for stocks, if they are bullish, and expect the price of the stock to go up.
Example, the price of XYZ company shares now is $30/ share. You expect the price to go up to $60/share. The strike price is $35. You buy a call option by paying a fee, called premium.
When XYZ share price goes up to $60 before the option expires, you have the right to “buy” the stock at $35, and sell it at the open market for $60. Bingo!!! You make money!!! 🙂
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Those who are pessimistic of the stock’s future performance, instead of buying a call option, they will buy (long) a put option.
Put option gives them the right, but not the obligation to SELL the underlying assets at specified price (strike price), within a specific period of time.
You know, people buy stocks at low price so that they can profit when they sell the stocks when the price goes up. But if stock’s price goes down, they cannot make money.
Buying a put option, allows them to make money even if the stock’s price goes down.
Example, XYZ company’s share price is now $60/share. You are bearish, and you expect XYZ company’s share price to go down to $30/share. The strike price is $55. When XYZ share price goes down to $30 before the option expires, you have the right to “sell” the shares at $55. You make money again! 🙂
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Now you understand, that when the investor is bullish about the stock’s performance and expect stock’s price to go up, he buys (long) a call option.
When the investor is bearish about the stock’s performance, and expect stock’s price to go down, he buys (long) a put option.
There are another group of people who wants to make money, by SELLING (writing) a call or a put option. I will share with more on the benefits and danger, of being a call or put seller in my next blog post, but before that, just make sure you understand the concept of buying call and put option. Stay tuned! 🙂
p.s. By the way, if you wish to discover a simple & halal way to create a positive monthly cashflow and calculate your net worth for FREE, then please click here…
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This post was written by:
- Islamic Financial Consultant, Helmi Hakim is back…. – February 7, 2023
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Put option is the right to buy and call option is the right to sell..
My fault..got it wrong.
Long call option is the right but not obligation to BUY, Long put option is the right but not obligation to SELL.
Stay tuned for my next blog post on selling (writing) call and put option. 🙂
Thank you so much for your generous blog post to share your knowledge. I respect your spirit of sharing. Way to go.=)
You are welcome Olivia… Do share this blog post, to those in need! 🙂