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Illustrations
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| The expiration payoff diagrams of four basic option positions are as follows: |
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| 1. Buy Call |
| A call option buyer will receive unlimited potential profit on the
upside. The potential loss is equal to the call option premium. |
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| 2. Sell Call |
| A call option seller will receive potential profit equal to the
call option premium and unlimited potential loss on the upside. |
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| 3. Buy Put |
| A put option buyer will receive unlimited potential profit on he
downside. The potential loss is equal to the put option premium. |
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| 4. Sell Put |
| A put option seller will receive potential profit equal to the put
option premium and unlimited potential loss on the downside. |
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| Trade
example 1 |
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| If you expect the EUR to be stronger against the USD: |
| Trading analysis |
| Buy a “EUR call USD put" option |
| Option style: |
Plain Vanilla (European) |
| Contract amount: |
EUR1,000,000 |
| Strike price: |
1.2100 |
| Spot price: |
1.1900 |
| Contract tenor: |
1 month |
| Premium: |
EUR5,000(0.5% x contract amount) |
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| (i) |
At maturity, the EUR / USD is traded above 1.2100, e.g. 1.2300
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You exercise the option to buy EUR1,000,000 against USD at 1.2100
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Potential gains: EUR1,000,000 (1.2300 - 1.2100) - option premium (EUR5,000)
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| (ii) |
At maturity, the EUR / USD is traded at or below 1.2100, e.g.1.1800
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You do not exercise the option and just lose the option premium (EUR5,000) |
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Trade
example 2 |
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| If you expect that USD/JPY would turn bearish: |
| Trading analysis |
| Sell a ”USD call JPY put” option |
| Option style: |
Plain Vanilla (European) |
| Contract amount: |
USD 1,000,000 |
| Strike price: |
117.00 |
| Spot price: |
116.00 |
| Contract tenor: |
1 month |
| Option premium: |
USD5,000(0.5% x contract amount) |
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| (i) |
At maturity, the USD / JPY is traded at 119.00
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The option is exercised and you are obligated to sell USD 1,000,000 against JPY at 117.00
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Potential loss: USD1,000,000 (117.00 - 119.00) / 119.00 + option premium (USD5,000) |
| (ii) |
At maturity, the USD / JPY is traded at or below 117.00
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The option expires and you gain the option premium (USD5,000)
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| Remark: |
The above examples are for reference only and shall not constitute
any representation or warranty |
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by the Bank in relation to any possible gain or loss. |
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