Understand the Logic of Option

Option; a specific asset of the investor (stock, index, foreign exchange or commodity) the right to BUY or SELL at a predetermined price until a certain date It is a financial contract that allows him to obtain it.

The most critical point here is: The option gives rights, but does not impose obligations.

That is, the option holder exercises this right if he wants, if he wants, he does not use it, and only takes the risk as much as the premium he pays.

This feature makes the option both a hedging tool and a flexible investment vehicle that offers a profit opportunity.

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Technical Terms and Functioning

1. Basic Concepts

Underlying Asset:

It is the instrument on which the option is overwritten. This can be a stock (e.g. ASELSAN), index (BIST 30), exchange rate (USD/TRY) or a commodity such as gold.

Usage (Strike) Price:

It is the fixed price at which the option can be exercised. The investor has the right to buy or sell at this price.

Maturity (Deadline):

It is the date on which the option expires. Until this date, the right can be exercised, otherwise the option will automatically become invalid.

Premium:

It is the price paid to purchase the option. The amount that the investor can lose the most is this premium.

Call Option:

From the set price RIGHT TO ALMA gives.

Put Option:

From the set price RIGHT TO SELL gives.
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How Does Option 2 Work?

Option buyer for the right to buy or sell the underlying asset at a certain price and date premium pays.

The option seller receives this premium but is obliged to comply with the contract if the buyer exercises his right.

Thanks to this structure, it can be used for both hedging and speculation purposes.

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3. Simple and Concrete Examples

Call Example

• X shares after 3 months Right to receive from 50 TL You have received a call option.
• You paid a premium of 2 TL for this right.
• If at maturity the share is 60 TL, you can buy it at 50 TL and sell it on the market for 60 TL.
• Your profit: (60 — 50) — 2 = 8 TEASPOONS.
• If the stock falls below 50 TL, you will not exercise the option, you will only lose a premium of 2 TL.
  

Put (Sell) Example

• After 3 months for the same share Right to sell from 50 TL You have received a put option.
• Premium: 2 TL.
• If the stock drops to $40, you sell at $50 and protect against the fall.
• If the stock stays above 50 TL, you will not exercise the option, you will only lose a premium of 2 TL.

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4. Types of Options

• European Type: The option can only be used at maturity. (Common in Borsa Istanbul)
• American Type: The option can be used at any time during the maturity period. (common on US stock exchanges)

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5. Uses

Hedging:

You can limit your risk by taking put options against the depreciation of the shares in your portfolio.

Speculation:

You can try to make a high profit from price movements by paying a small premium.

Revenue Strategies:

It is possible to earn premium income by selling options (e.g. covered call strategy).

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6. Benefits and Risks

Advantages

• The possibility of taking large positions with small capital (leverage).
• It can provide protection against falling.
• The risk can be limited in advance by paying certain premiums.
  

Risks

• Theoretically for the party selling the option unlimited harm It has potential.
• Time value melting: The value of the option decreases as the maturity approaches.
• Complex pricing: Variables such as volatility and interest have an impact on the premium.

The option, when used with the right strategy, is both prophylaxis as well high return It is a powerful instrument that offers potential.

However, due to the complex pricing structure and time value, the risk is especially high for the party selling the option.

Therefore, it is critical to experiment with small amounts before you start trading options, to learn the relationship between premium and maturity, and to know well the rules of the market in which you trade (Borsa Istanbul VIOP or USA CBOE).

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