Chapter VII. The futures market. Trading options on the RTS index.

VII.1. What are options? Website

Another type of derivative available on the Moscow Exchange is options. If a futures is a kind of first derivative of, for example, a stock, then an option can be called a second derivative of a stock or the first derivative of a futures. I.e., for an option, the underlying asset is a futures, and the option price changes depending on the behavior of the futures price, and that of the stock. Accordingly, the leverage embedded in options is even greater than that of futures, it turns out, as it were, a shoulder from a shoulder. Accordingly, options at the time of price movement become more expensive very quickly and vice versa. The dependence of price growth is nonlinear. Below we will give the method of calculating the option price.

An option is a fixed-term contract, that is, having a predetermined term of execution, which grants the buyer the right to purchase/ sell the underlying asset at the price agreed upon at the time of conclusion. This definition indicates the basic properties of the instrument: The option works with the underlying asset (BA), for which the main transaction will be made. This means that it refers to derivatives. The price at which the transaction for the underlying asset will occur is called a strike, and the execution date is the expiration date. Simply put, you buy an option for the desired strike and the price of this option further changes depending on the location of your strike to the central strike. Let’s say now the central strike on options on the RTS index is 115,000. You buy a CALL option for a 117 500 strike (the strike step is 500) in the hope that the price of the RTS Index will reach 117 500. If further the price of the RTS index really rises to 117,500 or higher, your option will sharply rise in price, and you will be able to sell it immediately for significantly more. However, if by the expiration date the RTS index reaches, for example, only the price of 117350, then on the expiration day your option will cost 0 rubles. This is the rules of such a game. There is another feature of the option – its price falls daily at a certain rate if the underlying instrument does not grow, approaching zero on the expiration date.

There are CALL (a buy option, its price rises when the price of the underlying asset rises) and PUT (a sell option, its price rises when the price of the underlying asset falls) options.

Usually, just buying pure CALL or PUT options is a very risky activity. Instead, options are made up of combinations called strategies, which allows you to get a more understandable and manageable model of controlling your money. In particular, the strategy allows you to use the fall in the value of CALL options to make a profit on a growing PUT option. By combining different numbers of such options at the same time, you get different strategies that allow you to get either more, but at a higher risk, or less, but at a lower risk.

The buyer of a pure CALL or PUT option is always in a more advantageous position in relation to the seller of the option – he risks only the value paid for the option (the so-called premium). The seller of a pure CALL or PUT option, if the price goes against it, risks a loss that varies exponentially, i.e. almost infinite (in theory).

Let’s show this by the example of the available options calculator on the website . Let’s go to the Services menu on the website –> Options analysis. On the Position Analysis tab, enter the portfolio name “Portfolio 1”, select the underlying asset RTS, click Create Portfolio.

In the New position field, specify:

Option à CALL à 117500 à 30.06.22 à RI117500BF2. Click Add position.

The following data is important to us:

The current value of the RTS index is 120,850;

The expiration date of this option is 16.06.22;

We plan to buy an option for strike 117500;

The cost at which we bought the option (set manually): 5840 rubles.

The current option price is 5840 rubles, the theoretical price is 6960 rubles, i.e. now the index is growing and the option price is growing behind it. 7 days before execution.

Figure 136. Calculation of the CALL option.

Note that Figure 136 shows two graphs: blue – the line of change in the price of options at the time of expiration, red line – the current settlement price of the option. The younger the option, the further the red line is from the blue, and this is the very premium of the option for which there is a struggle. The closer to the expiration time, the more the red line approaches the blue one – the option loses the premium part due to the time factor. Note that when the price of the underlying asset – the RTS index (horizontal axis of the chart) increases, the price of the CALL option (vertical axis) increases markedly. Also note that the horizontal section of the red line lies in the price zone -5840 rubles – this is the amount for which we bought the option. The lower this price, the higher our profit. I.e., we should try to buy the option as cheaply as possible. Next, we present a method for calculating the value of options taken from the MICEX website. This is for those who want to delve into mathematics and understand the principles of the price calculation model.

Working with options will require familiarity with the following concepts (Fig. 136-1).

The “in the money” option (ITM, In the money) is the name of a call (put) option, the strike of which is lower (higher) than the current price of the underlying asset. In other words, this is a situation where the price of the underlying asset is “on the side” of the buyer.

An out—of—money option is an option that has no intrinsic value at the moment, i.e. for call options, it is a situation when the current price of the underlying asset is lower than the strike price of the option. For putts, respectively, the opposite is true when the price of the underlying asset is higher than the strike price of the option.

Money option – the current price of the underlying asset is close to the strike price of the option.

Fig. 136-1. Types of options.

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