[Derivatives] What are Options and how are they used? A Beginner's Guide

[Derivatives Options: A concept summary for beginners]

Among the various investment products in the financial market, 'Options' are a powerful tool to prepare for future uncertainties and leverage market volatility. Although they may seem complex, understanding their core concepts can greatly help expand your investment horizons. In this post, we will take a detailed look at the basic concepts, key terms, and usage of options.

What are Options and how are they used?

Options are a 'Right'

An option is the "right to buy or sell a specific asset at a predetermined price (strike price) at a specific time in the future (expiration date)." The most important point here is that it is a 'right'. While a Futures contract obligates both the buyer and the seller to fulfill the contract, an option gives the holder the right but not the obligation.

To acquire this right, an investor pays a fee called a 'Premium'. If the market situation goes differently than expected, the investor can simply abandon the right, limiting the loss to the premium paid.

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Breaking down the core terms of options trading

Options can be broadly divided into two types.

• Call Option: This is the right to buy the underlying asset at the strike price. It is purchased when the market price is expected to rise. For example, if a stock currently worth 100,000 won is expected to rise, you can secure the right to buy it for 110,000 won in advance.
• Put Option: This is the right to sell the underlying asset at the strike price. It is purchased when the market price is expected to fall. For example, if a stock currently worth 100,000 won is expected to fall, you can secure the right to sell it for 90,000 won.

In addition, the Strike Price is the predetermined price at which the right can be exercised, and the Expiration Date is the last day on which the right can be exercised.

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Strategic use of options: Risk Management (Hedge) and Leverage

Options are not only used for speculative purposes to predict market direction. They are also very effectively used as a Hedge to manage the risk of a portfolio.

For example, let's say an investor holding 100 shares of Samsung Electronics is concerned about a short-term market decline. This investor can prepare for a decline by buying a put option on Samsung Electronics stock without selling the shares immediately. If the stock price actually falls, the value of the put option will increase, offsetting some of the stock losses.

In addition, options have a high Leverage effect because they allow you to acquire the right to a large-scale asset with a small premium. This can lead to large profits if the investment is successful, but it also carries the risk of losing the entire premium if it fails.

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Conclusion: A complex tool that requires careful approach

While options have the attractive advantage of limited loss, they are a very difficult financial product for beginners due to their complex structure and various variables. To use options for investment, it is essential to not only learn the basic concepts but also to fully understand more advanced topics such as Volatility and Time Value, and to make an effort to understand market trends. Above all, investment decisions should be made under personal judgment and responsibility.

Key Summary:
An option is a contract to buy and sell the 'right' to future price changes. It is a powerful tool that can be used for risk management and leverage. Sufficient learning and a careful approach are essential.

The content of this blog is for reference in investment decisions only, and investment decisions should be made under personal judgment and responsibility. Under no circumstances can the information in this blog be used as evidence of legal liability for investment results.