How can options lower risk in Belgium?
One of the most significant risks is to invest money in stocks. This is especially true if you have a large amount of money available because you are limited to one or two investments.
You can mitigate this risk by using options, which allow you to buy and sell shares at predetermined prices. Of course, there are also numerous disadvantages with options.
What are the options?
An option gives its holder the right but not the obligation to trade an underlying asset, for example, shares of company A on date X at price Y (strike price). The seller (or writer), on the other hand, has an obligation: he has to make sure that the stock is available at time X and price Y even when this isn’t always possible (think of a company going bankrupt and the value of the shares plummeting).
Why use them in Belgium?
Belgium has a relatively small number of listed options. This is because the size of the Belgian stock market is limited, making it more difficult to trade options with large amounts compared to markets like in America or Russia, for example.
Nevertheless, they can be valuable when you keep your risk low and still own stocks. By owning puts (see below), you can achieve this without having to spend too much money on transaction costs.
For instance, if someone wants to buy shares for €100 per share but only has €50 left and doesn’t want to use leverage, then an option could help him lower his risk.
Types of options
You have two types of options: calls and puts. Calls give the owner the right to buy shares at a specific price, while puts give the owner the right to sell shares at a specific price. Read more at Saxo Bank for more options.
Buying and selling options
You have to go through a broker when you want to buy an option. The most common way of buying is by paying a premium, which is the option’s price.
You can do this in cash or by borrowing shares from your broker (margin buying).
When you want to sell an option, you will get back the premium plus any dividends paid out until that point.
If the stock has gone down since you bought an option, you can also use this as an argument to sell the option and thus recover some of your initial investment.
How much do they cost?
The price of an option is given by supply and demand on the market. Because there are so few options available in Belgium, it’s not that easy to find up-to-date prices or quotes.
Therefore, I will use some foreign sites as examples:
● BATS Exchange (since 2007) : $27.00 per contract ($2.70 premium + $0.30 transaction fee)
● NYSE Euronext / AMEX (NYX) (2010) : EUR 5 per contract ($4 premium + 0.30 transaction fee)
● Russia’s Micex index (2011): RUB 2500 per contract ($80 premium + 0.11 transaction fee)
The advantages of options in Belgium
Less money, less risk: When you buy a call option with a strike price of €100 and the share price is €120, then you have already made a profit even before owning anything at all!
You can achieve this by buying an option that gives you the right to buy shares for €100. However, if the stock goes up above €120, you have no obligation to perform the trade.
In contrast, if you were to go straight into buying shares at €122 or more, you would have to pay the total price of €122, not just €120.
A considerable advantage is that you only need to pay a relatively small amount for an option compared to buying stock.
You will need to buy options with at least EUR 5 in premiums to be profitable because otherwise, the transaction costs are too high.
If you want to make sure you never lose more than 10%, then it’s also good practice not to spend more than 1% of the total value of your assets on transaction costs.
You can quickly do this by using puts instead of calls because they’re much cheaper and still allow you low-risk exposure.