options trading

[zero o]

also, options on indices and interest rates, how do they work? with equities, you basically buy papers (that the company promises to honor and grow) right? indices leh, who honors them? the bourse?

thanks!

All exchange traded instruments are "guaranteed" by the exchange. The exchange acts as a clearing house to ensure that all trades are matched. Just like a stock exchange, the exchange does not undertake the risk, but it has a mechanism in place to ensure that the position u have taken is properly reflected and honored by a counter-party.

 

[frametology]

All exchange traded instruments are "guaranteed" by the exchange. The exchange acts as a clearing house to ensure that all trades are matched. Just like a stock exchange, the exchange does not undertake the risk, but it has a mechanism in place to ensure that the position u have taken is properly reflected and honored by a counter-party.

in a case of buying options from a company, it'll be honored by the company itself, yes?
but when you buy an indices option, who honors it? and why do people buy indices options? it's like gambling with the STI, how it rises and falls right?

 

[zero o]

in a case of buying options from a company, it'll be honored by the company itself, yes?
but when you buy an indices option, who honors it? and why do people buy indices options? it's like gambling with the STI, how it rises and falls right?

Its a standard exchange instrument. Just like when u buy / sell shares, u dont have to worry about who the counterparty is. The exchange makes sure that the seller honours the deal, regardless of whether it is an institution, a corporation or an individual. So as far as u are concerned, "u have contracted with the exchange."

It is taking a "gambling position" on the indices when it is a naked option you are putting on, but if you have an exposre in the instrument itself, like say u have a basket of US shares, then it is what we call a covered option. IN a naked option position, if the market goes in your favor, there is a profit to be made. In the case of a covered option, what u lose in the basket of stocks should mirror what u gain in the option trade. In theory, it can be a one to one loss / gain, but in practise, there are many other factors that comes into play and u will not get a 1 to 1 loss gain ratio.

Thats why trading futures or options may seem like a simple affair, but in reality, it is complex.

 

[frametology]

Its a standard exchange instrument. Just like when u buy / sell shares, u dont have to worry about who the counterparty is. The exchange makes sure that the seller honours the deal, regardless of whether it is an institution, a corporation or an individual. So as far as u are concerned, "u have contracted with the exchange."

It is taking a "gambling position" on the indices when it is a naked option you are putting on, but if you have an exposre in the instrument itself, like say u have a basket of US shares, then it is what we call a covered option. IN a naked option position, if the market goes in your favor, there is a profit to be made. In the case of a covered option, what u lose in the basket of stocks should mirror what u gain in the option trade. In theory, it can be a one to one loss / gain, but in practise, there are many other factors that comes into play and u will not get a 1 to 1 loss gain ratio.

Thats why trading futures or options may seem like a simple affair, but in reality, it is complex.

wah. okay. this is complex. thank god i'm still a student. i shall worry about the financial world when i start investing. HAHA.

by the way, thanks for your input.