Listed options
Rules, protection and tax below are for Japan.
What it is
A standardised, exchange-traded contract on a share, index or commodity. A call gives the right to buy at the strike price, a put the right to sell, until expiry. The buyer pays a premium up front and can lose no more than that; the seller collects the premium and takes on the obligation, with potentially unlimited loss.
Options are priced by time and volatility, and both work against the buyer: every day that passes eats the value, and the market's expectation of movement is already in the price. To profit, the share must move further than the market already expects, in the right direction, before the clock runs out.
Used carefully by professionals to insure portfolios. Used by most retail traders as a cheap lottery ticket, with lottery-ticket results.
How it works
- A buyer pays a premium for the right; a seller receives it and posts margin against the obligation.
- The contract has a strike price, an expiry date and a multiplier, usually 100 shares.
- Value comes from how far the share is beyond the strike and how much time and volatility remain.
- At expiry the option is exercised if it is worth something, or expires worthless.
The honest pros and cons
For
- A bought option limits the loss to the premium paid.
- Puts can insure a portfolio against a fall, at a known cost.
- Selling covered calls on shares you own can add a little income.
Against
- Time decay works against buyers every single day.
- Most bought options expire worthless; the odds favour sellers, who take unlimited risk to get them.
- Complex enough that regulators in several countries restrict retail access.
- Commissions and spreads are large relative to the sums involved.
Getting it in Japan
not researchedWherever you are
- Before any trade, work out the break-even price and the probability of reaching it by expiry; brokers show it.
- Only buy options with money whose total loss you have already accepted.
- Never sell uncovered options; the loss has no ceiling.
Go deeper
Also called
calls and puts, stock options, F&O, derivatives
Often confused with
- Domestic shares: Part ownership of a company listed in your own country.
- Contract for difference: A bet on a price move made with borrowed exposure; you never own the asset and pay daily interest on the borrowed part.
- Futures: A binding contract to buy or sell something at a set price on a future date, traded with borrowed exposure.