Share Option Investment and Trading, with further reference to using it as a

share trading strategy, and the associate risk, as well as the difference
between Share Options and Share Warrants
As below, to be signed by the writer:
I, the undersigned, certify this essay to be a result of my own original
research, and that no part of this had been shared with, or obtained from, any
other person or persons, previously or currently taking, International taxation
during the term ending January 2014, irrespective of class:
Student Number: 2013059087
Name: Victoria
Date:
Signature:

Table of content (list part of essay)

An option is a contract that gives buyer the right or option to either buy or sale
asset at the particular price on or before the expiration date. However, Europe
is a special case. The asset can be any type of investment with unsustainable
price such as stock, property, currency, gold, and so on. Options are classified
according to the way in which they can be exercised. United States-style
warrant used by many countries can be exercised at any time up to the expiry
date. In contrast, in Europe option can only be exercised on the exact expiry
date itself. Option works like insurance to insure the investors investment. It is
one of the financial instruments that can super charge the return in either
direction. The reason why an option is so powerful is because option uses the
concept of leverage which allows the investor to pay a small sum of money to
control a lot number of shares and therefore achieve bigger money if the

hence proof were correct. The amount paid for options is called premium
while the actual price that will trigger the option is strike price or exercise
price. Option is most often used in the context of stock and share, which is
volatile and more commonly called as share option or stock option. Basically,
options are traded between investors in financial market called option
exchange without any involvement from the underlined company.
Ken believes shares at M&S are going to rise in price. He does not own any
share so he talked to Bob. Bob has 100 shares of M&S and think their fairly
price is $20 or even due for a fall to $15 next month. Bob agree to sale his
shares to Ken for $20/share next month. However, Ken need to pay to
purchase this option. Bob and Ken agree that the fee for the option is $200
which also called premium. If the price for M&S share shoot up to $30 next
month, Ken can exercise the option and Bob is forced to sale his shares at
strike price. This means Ken can buy 100 shares from Bob for $2000 plus
$200 fee paid for the option and sale them for $3000, his profit is $800. Option
generally cost less money, less risk, capping losses to a maximum amount
than buy directly at the market price. Ken gets to participate and involved in
the movement of the stock at the fraction of the usual price. If the unthinkable
happen and the price fall to $15 than Ken only losses the $200 he paid for the
option. There is no point Ken paying $20 for Bob shares when he can buy
them cheaper in the market. For people who buy the shares directly from the
market will lost $500 while Ken who exercise the option from Bob for $200 the
absolute most he can lose is $200 he paid for the option. However, the buyer
needs to consider the risk of losing the premium for buying an option in case
the price goes up or down because if he just bought bunch of stock option
contracts carelessly, he need to pay for a premium which also known as
guaranteed initial loss.
The case above is also an example of call option also refers as buy option
which is the contract between two parties to exchange stocks at strike price.
One party which is the buyer of the call option has the right but not an
obligation to buy the stock at the strike price by the future date while the other
party which is the seller of the call option has the obligation to sell the stock to
the buyer at the strike price if buyer exercises the option. The other type is put
option which is the right but not the obligation to sell when the price is going
down on or before the certain date. In fact, call option is a long position where
the buyer believe the price will go up while the put option is short position
where the buyer are betting the price will go down. The call option is in the
money if it above the strike price while the put option is goes below the strike
price. Furthermore, the more the underline asset is proceeded to appreciate
the higher the premium demanded by the market for that option.
The first reason why people use options is as speculative instrument to
speculate the strong move of a price in a given direction. The leverage option
means it can put an order of magnitude on to the profit. Imagine unfortunate
thing that will make put option in the oil price collapsed in 2014 or bought call
option in apple just before the announcement of the new wonder product by
the company. Equally get the call wrong and lose the ten times as much as
future bonds share. That is why the buyers can only speculate with their

money that they can afford to lose. The second reason of option is used by
many sophisticated investor which called hedging and more like insurance
policy to protect against losses. Let say Ben make his main investment in the
share because he think the share is undervalued and likely to rise quickly but
just in case he is wrong so he take a put option that will be trigger if the price
false. Either way he can make money if the significant price moves. The
strategy is less successful if the prices just stay flat.
Final use of option is mention in any business is employee stock option. It is
off market strategies for the employees giving them the right but not the
obligation to buy shares as a formal compensation and incentive by the
company that they work for and agree in usual preference price before the
expiration date is reach. Granting employee stock option to highly executive is
becoming increasingly popular. These days executive expected to be given
stock options before and even consider taking up to a position. Both public
and private companies followed this practice. It is a great way of lining
everyone priority. If the company does well the share price will rise and the
employees have the right to buy the share at lower price fixed at the
beginning which can make an instant profit for them in a short time. Knowing
that employees can make a profit when the company share price goes up,
they are motivated to work hard to help the company growth. This is the
reason why employee stock options are such a popular compensation options
in which way ends up with a win-win situation between the company and its
employee.
Ed is working at Apple Co. as a manager and he was offered employee stock
option to buy 100 shares at $20 each. It is the price at which stock is trading
currently and Ed can only exercise this option in one year. The company did
well and after one year its shares shows up with $30 each. Ed can now
exercise his right and buy 100 shares at $20 through the employee stock
option and would give Ed instant $10/share profit or he can continue to hold
on to the share for potential future capital gain.
Warrants are financial instrument which gives the holder the right to acquire
shares at a certain price within a stated period. Call warrants allow traders to
profit from share price increases, while put warrants let traders make money
when the share price falls. For traders in the warrants the difference between
United States and Europe is of little concern as the warrant issuers provide
continuous bid and offer prices for their respective warrants. Warrants are in
profit (in the money), at a loss (out of the money) or breaking even (at the
money) depending on where the current share price is relative to the exercise
price. Share warrants offer the same benefit as options but they have two
fundamental differences. First of all, the warrants are issued by the company
itself rather than other investors. If the buyer assumes the shares of Wal-Mart
shares are going to go up, he might look for call warrant issued by the
company rather than taking optional some shares belonging to other
investors. The second difference concerns on what happen when the optional
warrant is exercises. If the buyer exercises the call option than another
investor to buy Wal-Mart shares 5 he takes delivery of the shares hence.
However, if the buyer exercises the warrant to buy the same share at the 5,

Wal-Mart will provide the shares to fulfill the transaction. The Company issue
the share warrants to clarifying the incentive to enhance the long-term
corporate value of the Company to Directors and Executive Officers, and to
foster the same perspective on corporate value with the shareholders.
Furthermore, the company can benefit itself because of raising money.
Warrant is more favorable than other options because it tends to be cheaper
to buy than the options so the buyer can control even more shares for the
same amount of cash. Furthermore, it is also because warrant has much
longer life span than option. An option turn will usually be not much more than
two or three years whereas warrant can be available up to 15 years. It is very
suitable for medium to long term traitor, it requires directly from the company
and can give the perfect balance between risk, time scale, and investment. In
other word, it got much longer time period to prove the hunch of its buyer that
he has with the option. Variation of the warranty means cover warrants and
sometimes also called naked warrants. It tends to be suited by the financial
institution around the company and can have the mixture financial instrument
underlined. It could be equity, bond, currency, and so on. After all, covered
warrants will tray on number of public stock exchanges. The premium paid by
the buyer for the covered warrants will tray the most the buyer can lose. There
is no concept of margin costs so buyer liability is limited. It called covered
warrant because the issue will cover itself or hedge its back by buying the
underlined investment in the market. This tends to be shorter term than equity
warrant usually 6 to 12 months and there have more in common with option
than traditional warrants though they do tend to have longer maturity date.
Warrants are full of trading that the one who can get involved is only the
professional and the person who already trained by professional. They are not
for beginners because the buyer can easily lose all his money if he is not
careful. On the other hand, if the buyer knows what he is doing, warrant can
be cheaper and more flexible than option because it gives a longer period in
which to be proof right.

Acronyms
Leverage:
Glossary
M&S: Mark and Spencer