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Because life really doesn't need to be that complicated.




SAY something





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Layout: vehemency
Saturday, August 22, 2009, 9:48 AM
Options

I have concluded that traders are indeed some of the most creative (albeit greedy?) people around.

No, they are not content with just transactions as in a 1-to-1 exchange. Like how when you go to the stall, you pay $3 in exchange for a plate of nasi lemak. Bah! There's no kick in that.

Why not decide today how much you want to buy that nasi lemak in 6 months time? I chope first to pay only $3. So even if your rent goes up, you cannot charge me more. This is known as forwards.

Better still, let me say I want to buy that plate of nasi lemak in 6 months time, but have no real intention of actually getting it. I can find a way to unwind this position before that 6 month expiry. So I can make a profit if you start charging higher, but I don't need to be actually eating the nasi lemak. This is known as futures.

Confused? This is only the start! Then come the huge world of options. If I believe the nasi lemak might go up to $5 due to rice shortage or something. I can long a call option so that I have the right to buy nasi lemak at $4 even though it went up to $5.

Then there's the interesting mix of options to make straddles, strangles, risk reversals, butterflies, condors, seagulls etc... (hrm, there seems to be an affinity with things that fly huh!)

Then to measure how profitable your option is, there are greeks like delta, gamma, volga, theta (similarly, the list goes on...) And let's not even start on the calculations behind these things!

Gah. I'm confused.
But then again, studying options have reaffirmed an important point.
In this world, there truly are endless possibilities.