The Logic of Options: Key Information for Investors

The Role of Options in Investment Life

Understanding options can be made possible through simple everyday examples rather than complex graphs or challenging formulas. Explaining the fundamental logic of these tools through the car buying process provides important insights into the investment world.

Basic Strategies from the Car Example

Suppose you are interested in a car that costs 2 million TL. However, you are not thinking of buying it immediately; you are curious whether the price will rise or if your priorities might change. At this point, you offer the seller, "I will pay 100 thousand TL for the right to purchase this car at 2 million TL for one month." This 100 thousand TL is the "premium" in the options market.

Scenarios and Probabilities

• When the Price Rises: The car price has increased to 2.3 million TL. However, you still have the right to buy it for 2 million TL. You will make a profit with the premium you paid.
• When the Price Remains the Same: The car is still 2 million TL. You can choose to buy it or walk away. Your loss is limited to just the 100 thousand TL premium.
• When the Price Falls: If the car has dropped to 1.8 million TL, you can go and buy it for 1.8 million TL. No one can force you to buy it for 2 million TL, and your loss is again limited to the premium.

Types of Options and Their Applications

In the financial world, options are used according to different strategies. Let’s explain the main types of options based on the car example:

• Call Option: The right to buy at a future price.
• Put Option: The right to sell an asset you currently own in the face of a decline risk.
• Covered Call: A chance to earn additional income while holding onto an asset.
• Protective Put: Provides protection against decline risk.

Flexibility and Opportunities of Options

Options distinguish themselves from other investment tools due to the flexibility they offer to investors. When you directly buy a stock, both the risk and reward lie entirely with you. However, options provide the opportunity to manage your scenarios in a more controlled manner. You can capture significant profit opportunities with a small premium and minimize existing risks.

Conclusion

In conclusion, options not only provide profit opportunities but also help investors manage their risks. By offering the chance to create large opportunities with a small cost, they make your investment process more controlled.