People have been using options since ancient times. Even the ancient Phoenicians and Romans entered into special contracts when transporting sea cargo. The famous Dutch tulip market of the 17th century is known, where trade, through the conclusion of fixed-term contracts, was carried out by people who did not even have the means to buy one bulb.
The development of modern options is associated with the creation of the Chicago exchange in 1973. The emergence of the Chicago legal entity allowed the standardization of forward transactions and the creation of a pricing model. Until this time, options trading was carried out in small volumes, since the necessary information for trading was difficult to access or absent altogether.
Option premium
The option premium is compensation for the financial risk to the seller. It covers his loss in the event that it is unprofitable for the buyer of the option to exercise it.
Here is a simple example of an option agreement: the buyer and seller entered into an option agreement on the possibility of the buyer purchasing from the seller 10,000 dollars at the rate of 50 rubles within two months, starting from now. Let's assume that during these two months the dollar exchange rate increased and amounted to 70 rubles. Then it is beneficial for the option buyer to demand fulfillment of the terms of the option contract and buy $10,000 at a low rate. And accordingly, if the rate fell to, for example, 49 rubles, then the execution of the option contract may not be profitable for the buyer, and then he may not exercise his right and not buy this amount of currency from the seller of the option.
About the difference between an option and an option contract
In the case of an option to conclude a contract (Article 429.2 of the Civil Code), the subject of the option is the right to conclude the main contract. Those. An option is a special contract (agreement, as it is called in the text of the article) on the sale (as a rule, although other reasons are possible) of the right to conclude another contract.
In the case of an option agreement (Article 429.3 of the Civil Code), it is any agreement with a condition on postponing execution on it until demand or until the occurrence of certain circumstances for a fee (or on other grounds).
Thus, the main difference is that under an option, the right to conclude an agreement is acquired, and under an option agreement, the right to demand under the concluded agreement is acquired. But in both cases, the good (economic object, interest) that the party acquires is the right of expectation - the state of certainty of contractual terms for a certain period and, accordingly, the connection by this certainty of its counterparty, who is in a state of suspension of the offeror or in the state of the party awaiting demand, while the conditionality of the fulfillment of each of the relevant obligations is covered by the general norm of Article 327.1 of the Civil Code.
What is the point of distinguishing two forms of satisfying this interest, which certainly deserves support?
I think the whole point is in the turnover of the right of expectation.
If the parties initially expect to interact with each other, they do not need an option; they immediately agree on all the conditions and put the execution on hold “on demand”. In this regime, the change of party to the contract is subject to Article 392.3 of the Civil Code (transfer of the contract).
You can probably enable this mode not only for the first execution in order, although this is perhaps the most popular scenario. The contract can be structured, for example, in such a way that the seller transfers the item under the contract with a currency clause, and then puts the payment on hold, during which he selects the most favorable rate for payment (compensating for this, say, with a discount). If the seller has not made a decision by the end of the term, then the contract, according to the direct instructions of clause 1 of Article 429.3, is terminated, and settlements of the parties are made in the manner established by them or according to the rules of paragraph 2 of clause 4 of Article 453 of the Civil Code. However, in my opinion, the rule on termination of the entire option agreement upon expiration of the waiting period is not mandatory, and the parties have the right to stipulate that only the right of demand is terminated. In the latter case, apparently, the rules of paragraph 2 of Article 314 of the Civil Code apply - the buyer has the right to transfer payment or demand that the seller accept it, attributing to the latter the risks of delay in execution (Article 406 of the Civil Code).
If a party needs freedom to alienate the contractual position it has reserved, and the party that gave such a reservation also counts on this, then an option is issued that can be resold, pledged, etc. without the consent of the issuer (clause 7 of Article 429.2 of the Civil Code).
It is likely that these two articles were the result of a compromise between two points of view:
a) conservative – that there is no point in the option construction of the “right to the right”, because the corresponding interest can always be described by the right to a direct material object (goods, works, services); if the two parties know what they want, they can immediately establish an obligation, and there is no need for an obligation to establish an obligation; and if they don’t know, then there can be no obligation or can only be in the form of a preliminary agreement;
And
b) pragmatic - that meaning appears when law is alienated from its subject, i.e. it is born by a turnover that relates to the right impersonally, as just one of the objects, benefits, freely transferable from one person to another, for which there can be no theoretical obstacles, as they were not in the cases of shares, derivative financial instruments and shares in the authorized capital capital of the LLC (see also: Ivanov S.S. On a transaction aimed at alienating a share // Journal “Zakon”. – 2012. – No. 8, pp. 137-138). The complication of social relations has led to the emergence of new values, objects of a derivative (secondary) type, when benefits can be brought not only by things (persons) in themselves, but also by social products in the form of rights to things (to persons), formed by developed social reflection.
In connection with the relationship between an option and an option contract, two questions also arise:
1. Is an agreement to grant an option an option contract? No, it is not, since no action is required from the issuer of the option - the option is “granted” by virtue of the agreement, automatically, i.e. The right to conclude a contract arises immediately at the moment of conclusion of the agreement. In other words, the grant of an option is not execution of the option agreement, since no such exercise is required.
2. Can an option agreement be structured as an option contract? Maybe, since within the meaning of clause 1 of Article 429.3 of the Civil Code, the parties have the right to postpone the emergence of the right to conclude an agreement and (or) condition its occurrence on any circumstances, incl. requirement of the option buyer to issue it.
Here we can cite as a completely appropriate analogy, since we are talking about personal rights, the model of the relationship between the basis of the assignment and the assignment itself dissolved in this basis in paragraph 2 of Article 389.1 of the Civil Code (see also: Ivanov S.S. Decree. cit. P.134) - this model works by default, however, the parties have the right, by applying the principle of separation, to stagger in time the moments of concluding an agreement and the “completion” of an “administrative transaction” under it, or more precisely, the occurrence of conditions under which the administrative effect inherent in the agreement is realized .
Strike
The predetermined exercise price of an option is called the strike. In other words, this is the price of the investment underlying asset that option buyers expect. And option sellers, for their part, hope that market quotes will not reach this level.
Each participant in the transaction is able to determine the strike level that suits him. And it is the correct choice of the option exercise price that will ultimately determine whether the concluded transaction will result in profit or loss. These levers for controlling the mechanism of the option contract become especially relevant when choosing a certain type of option. Let's find out why.
Option basis
This is exactly the price of the option at which the buyer will purchase it if the contract is exercised. The base value is fixed at the moment the contract is concluded and does not change until the end of the expiration time.
It is worth noting that all options markets have standardized contracts and a daily settlement system. Debts are not carried over to the next day. Such forward transactions are concluded not for amounts of money, but for contracts. It is their combination that must correspond to the required sales/purchase volume.
Types of options
There are several types of option contracts. The most common classification according to the direction of purchase is call and put.
A call option provides the right to buy an asset at a certain price within a certain time. Globally, this is a traditional long position on the stock exchange, when a trader has bought a call option and hopes that it will rise in price until the contract expires.
Put option is a reverse selling option. Its owner receives the right to sell the exchange asset at the price established in the document at a predetermined time. This is, accordingly, a short position in the auction. In pursuit of profit in the context of a forecast that the price of an asset will fall, the trader will try to sell the put before the expiration of the period specified in the contract. Thus, depending on the situation on the stock exchange, the owner of put and call options can use his specific option and build a strategy on it.
In addition to the direction of purchase, options are classified by type of asset. There are currency options, stock options (a stock option agreement or an option agreement to buy securities) and commodity options (for example, precious metals).
And one more sign by which options are classified is the exercise (expiration) date. European options are distinguished here - when the transaction occurs on the last day of the option contract. And American options - when a transaction can be made at any time during the entire period of validity of the option contract, with only one caveat: the transaction takes place on a business day. For the Russian exchange, only the American type of options takes place.
The concepts and principles of certain types of option contracts are regulated by articles of law. For example, the law establishes the concept of “issuer option” - this is a security that gives the owner the right to buy a certain number of shares of a given issuer at a predetermined price.
Often, even among confident traders, there is confusion between an option (also known as an option to enter into a contract) and an option contract. The main difference between an option and an option contract is that an option gives the right to conclude a contract, and an option contract gives the right to demand that the responding party fulfill the contract. In other words, an option provides for the subsequent conclusion of the main contract, while an option contract has already been concluded and implies immediate execution.
So, an option is an excellent mechanism for choosing a strategy, especially during periods of market uncertainty. A deep understanding of the logic of this tool and proper application in exchange trading can significantly reduce the investor’s potential risks. Indeed, in the worst case, the option buyer loses only the option premium and is not obliged to exercise the option contract. However, if the market situation is favorable, his income from options management can provide him with a comfortable existence for a long time.
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For which contracts can an option be used and what kind of option it can be?
An option can be issued to conclude any contract (contract, provision of services, etc.). Most often it is used when buying and selling shares or shares in an LLC, in stock trading, and real estate transactions. Please note that the specifics of certain types of options may be established by law (clause 8 of Article 429.2 of the Civil Code of the Russian Federation).
The offer can come from any of the parties. For example, a buyer purchases two passenger ships, and in relation to two more ships enters into an option agreement, that is, receives an offer from the seller to sell them. Thus, he will retain the opportunity to purchase them at the agreed price during the period specified in the option. This option is also called a call option.
If the offer comes from a potential buyer, then he is obliged to buy the property if the seller expresses his desire. This relationship model is called a put option.
