Explaining Options
Trading in options is very different from trading in stocks or futures. Investments in options can become worthless within the course of a few weeks. When trading with stocks or futures this does not happen as quickly. On the other hand, options have the possibility to make a lot of money with a relatively small investment, as with futures. Options can also serve as a protection against high appreciation or devaluation of share prices, and give you the opportunity to make a profit out of the declining as well as the rising stock market, just like futures. For more information on this subject, please look at our page about risks.

Options were still relatively unknown in the nineteen eighties, up until nineteen eighty-seven, when the stock market collapsed and many investors lost a lot of money. With the exception of the option market, where there was a good reason for celebrating, because trading options gives the opportunity to make profit on a falling market as well a rising market. Several option investors became millionaires that year.

What exactly is an option? An option is nothing more than the right to sell or buy at a previously defined price. Options are widely represented, not only when it comes to trading the stock market but also when buying a house for instance. When your buying a house there is the possibility to take out an option at that particular property for a short period to be able to reflect before you actually purchase the property. This type of option gives you the right to buy the property within the predetermined time span of the option.

Option Trading
Trading with options is trading with rights that can be exercised over time, very much like trading with futures. To be able to exercise the right to an option, an amount of money needs to be paid, a premium. There are several different kinds of options each with their own corresponding rules. Options can be acquired for indices, equities, bonds, gold, silver or the dollar. Here, we will focus on options on indices, but the addition of products such as gold, silver and currency will allow you to use our advice as well. Do note that trading in options is not for the average minor investor, you will need a vast amount of money to be able to trade with options, which makes it less suitable for minor investors. Traders and large companies to try to ensure themselves against large dollar fluctuations usually use options. Take a large company like Shell for instance; when they order a new oil platform, a large sum of money, and delivery will take about three months, they want to ensure themselves against an unexpected rise of the dollar rate. In this case, a call option is the rights insurance to make sure that the price remains the same. Reversed, the company that is supplying Shell with the oil platform will want to make sure that they can sell at a reasonable price, they can ensure this by buying a put option. This way when the dollar rate drops all of a sudden they will be able to sell at a reasonable price.

Call options
Every option allows either a call option or a put option to be bought or sold. Buying a call option gives the buyer the right to buy the underlying value at a certain period at a predetermined and fixed price. To be able to exercise this right, the buyer needs to pay a premium. Although the initial goal of market trading is to make a profit, in this case dividend will be paid out as well.

Buyers who sell their right to a call option are called ‘writers’. As a writer, you are always obliged to deliver the underlying value. If the buyer of the call option decides to exercise his right to the option, the writer has to deliver the shares, gold, silver or currencies and the call option buyer will receive the predetermined price for every product. With put options this process is reversed, as option owner you will have the insurance to sell the underlying value for a predetermined, fixed price. As Perfect Indicator we are not involved in writing options, we are only involved in buying and selling call options or put options. As the buyer of an option, your loss is limited to the premium that has been paid.
When selling an option the seller commits to the obligation to always either buy or sell the underlying value. In return, you will receive a premium. When the rates do not stay at the same level but start rising or falling rapidly, the call option buyer will exercise their right. As the writer of these options, the risks are on you and your losses can be a lot higher than the premium you once received. When writing on a transaction there is no limit to the suffered loss, which is why we as Perfect Indicator do not write on options.

Experation date
Another factor in trading with options is the experation date, which expires every third Friday of every month, and is adopted internationally. An option bought in the month of June will expire the third Friday in June. After the experation date, the option has lost its value and no rights can be exercised over these options.
The days before the actual expiration date usually show a rather fluctuating rate because the interests of call options and put options are traded against each other. Fact is that all options expire on a Saturday, but as there is no possibility of trading on a Saturday, it gives the traders some extra time to get their administration in order.
In-the-money, At-the-money, Out-of-the-money

Call options with a lower exercised rate then the current exchange rate are called ‘In-the-money options’. These options are the most valuable, because exercising your right immediately means that you are able to buy shares on the stock market at a lower price than the current rate. Put options are in-the-money if the exercised price is higher than the current rate, when these options are just about making a profit they are called ‘at-the-money options’. ‘Out-of-money options’ are options that do not have any value when you want to exercise your right. This means that the exercised price of a call option is above the current rate, and the exercised price of a put option is lower then the current rate.
Exercised Price Rate Intrinsic Value Definition
300 320 20 in the Money
320 320 0 at the Money
350 320 0 Out of the Money

Financial newspapers print the everyday options, complete with the number of contracts per option on a daily basis. These are often called ‘open interest’ or ‘open contracts’. When large numbers occur, there is speculation with a share. As a trader, even when you are not trading in options, you must always pay attention to these numbers, after all there are many different interests involved in wanted to get the rates in a certain direction.

American style & European style
There is also a difference between American style option trading and European style option trading. A European option can only be exercised on the expiration day, whereas an American style option can be exercised every day up to the expiration day. When trading in options the American option usually prevails. However, options on indices can only be traded in European style, so they can only be exercised on the expiration date and not beforehand. The reason for this is that indices options require a ‘cash settlement’, which means that the options financial value has to be calculated and used as a guideline for payment. This is because an index is not a tangible commodity, unlike shares in a company.
An option on an index is always traded by a hundred, just as options on shares. By trading with index options, you are able to retain a profit with both a rising market and a falling market. The two main factors that can change the price of an option are the current rate and the flexibility of the underlying value. The best and most expensive options is a call option with an exercising rate as low as possible and the longest possible time span. These options have to be required on the share market, not the option market.

Call option Example
The current state of the AEX-index is set at 320, but you expect it to rise substantially in the near future, so you decide to buy a call option ‘AEX 350 October’. Because this option is traded in hundreds, just like every other option, the underlying value is 100 x € 350 = € 35.00.
The AEX-index has reached a value of 350 on the third Friday of October, and because this is a European style option, the options can only be settled on this particular day. When you exercise the option, this sums op to; the AEX closes at 370 this day, 20 points above the 350 mark, which translates to a € 20 benefit for the call option holder. Because the size of the contract is in hundreds, the call option holder will receive € 20 x 100 = € 2000. Where the call option holders have a profit of € 2000, the writer has lost € 2000, which is all in the zero-sum game called trading.
When the stock market has reached a lower level than the current 350 by the expiration date, the exercise price is lower than the index rate and the call options have lost their value. In this case, the writer has a substantial profit, they received your premium and there is no settlement at the end of the period

Put option Example
You expect a substantial decrease in current rates. The current rate of the AEX is 320, so you buy a put option ‘AEX 300 October’. If the price indeed drops below the 300, you are making a profit. Suppose that the index drops to 275 on the expiration date. At the stage the call option buyer is allowed to exercise his rights as well which adds up to 100 x (300-275) = € 2.500.

Leverage effect
The difference between buying options and buying shares is that there is a lot less money needed to achieve the same result. The easiest way to explain this is through an example.
The price of Shell share is listed on € 100 at the first of august. That same day the call September notes € 10. Three weeks later, on August 29, the share registers at € 110 and both the investors and the option investors decide to sell, what are their results?

Equity Investor:
1st of August purchases 100 shares Shell á €100 = € 10.000
29th of August sells 100 shares Shell á € 110 = € 11000
Profit: € 1000 (is 10% return on investments)

Option Investor:
1st of August purchases 1 call Shell September 110 á 9 euro = 100 x 9 = € 900
29th of August sells 1 call Shell September 110 á 13 euro = 100 x 13 = € 1300
Profit: € 400 (is 44% return on investments)
The profit made by the equity investor is € 600 higher than the profit made by the options investor, but the investment needed to create this kind of return was ten times higher than the investment of the option trader, this is the essence of the leverage effect, to create a bigger return with a smaller investment.

What determines the final price?
The value of the final price or final rate, is not determined the exact closing rate of that day, because of the many thousands index option contracts involved this is a very precise undertaking. Each third Friday of the month between 15.30 and 16.00 the index rate is noted every minute. The average taken from those thirty values is determined as the international settlement rate for index options. This can create a rather fluctuating pattern of the index during that half an hour because investors are trying to safeguard their interest

Period
Last is remaining time for the options, the longer the remaining time, the better the chances of the option gaining value or getting value. With the passing of the time the expected value, the time value and the expectance value, will decrease. The decrease in expected value does not follow a linear pattern or proportional by time factor. Experience shows that a nine-month at-the-money option contains its value for the first seven months, in the course of seven months some of the time value and expectance value will be lost but this increases rapidly during the last one to two months. Until the only thing left on the expiration, date is the intrinsic value.

Conclusion
The main conclusion is that options can generate a good return, and even more so when you use the Perfect Indicator system. All you need to join the options market is an investment capital of a few hundred euros. However, be warned, the options market is no place for small or starting investors. Options are quite complicated, and take time to learn and understand, once wrong order with a broker can have devastating consequences. We also recommend that, as an investor, you should never write, because of the existing risks of unlimited loss. When you do want to get started with trading in options do your research and always use the smallest investment possible and spread your risks. The options market can be very fast, chaotic, and huge wins and huge losses lie close together. Perfect Indicator does not give you exact options trades (yet) and do not tell our customers which series they need to buy or sell. So trading with options will involve some studies of your own, mainly because we would like you to experience the whimsical options market yourself.
Selecting the right and most suitable options out of hundreds of possibilities is a difficult task. Many traders base their decision on a feeling; however, we at Perfect Indicator feel that trading on feelings is not quite desirable behaviour. It is far better to study and investigate matters well before making a decision based on available facts, not feelings.
If you decide to go in to the field of option trading after some tutorial lessons, but are still in doubt about what kind of option series to trade with, look at the trading volumes. Choose an option value that is traded with often, they tend to have a better price than options that is not traded as much. Another option is studying large, listed companies such as Shell, is you are contemplating shares in that company, and look at the company numbers, where are they taking you? At this stage the traders of Perfect Indicator do not out trading advice on options, but when you are a more experienced trader, our signals will be able to help you with your trades.