Course index:
- Basic Concepts of Money and Personal Finance
Introduction to the value of money, the importance of saving, and spending control. - Budgeting and Financial Planning
Create a personal budget, manage income and expenses, and set financial goals. - Inflation and Purchasing Power
Explanation of how inflation affects the value of money over time. - Interest Rates and Time in Finance
Differences between simple and compound interest rates and their importance in investments. - How to protect your savings. Protect yourself from scams.
How to protect your money from the scams that abound today - Basic Savings Instruments
Explanation of savings accounts, term deposits, and how they work. - Introduction to the Stock Market
Basic concepts of the stock market and its role in the global economy. - Actions: What They Are and How They Work
Explanation of stocks, types (common and preferred), and how to invest in them. - Bonds: What They Are and How They Work
Differences between corporate and government bonds, and their importance in diversification. - Risk vs. Return on Investments
Concept of risk and how it affects investment choices. - Diversification and Creation of Basic Portfolios
Basic diversification principles to reduce risk in an investment portfolio. - What is an ETF and How Does it Work?
Introduction to ETFs (exchange-traded funds) and how they track market indices. - What is a Mutual Fund?
An explanation of mutual funds and their benefits for beginners. - Financial education for the family
All the information you need to make ends meet. - Economic Cycle and its Impact on Investments
How the stages of expansion and contraction in the economy affect investments. - Growth Stocks vs. Value Stocks
Learn about different types of actions and what to expect from each one. - Fundamental Analysis of Stocks
Explanation of how to analyze a company's value based on its fundamentals. - Basic Technical Analysis: Charts and Patterns
Introduction to basic technical analysis tools, such as trend lines and candlestick patterns. - Options: What They Are and How They Work<<<<<<
Basic concepts of call and put options and their uses in investments. - Futures: What They Are and How They Work
Introduction to futures contracts and their application in investment and speculation. - Introduction to Cryptocurrencies
What is digital money, how it was created, and the characteristics of Bitcoin and other cryptocurrencies. - Blockchain and its Importance in Finance
How the technology behind cryptocurrencies works and their applications in finance. - Risks in Cryptocurrency Trading
Volatility, fraud, and regulations in the cryptocurrency market. - Leverage Principles and its Risk
What it means to trade with leverage and the associated risks. - Investor Psychology and Emotion Management
How emotions influence investment decisions and tips for managing them. - What is Algorithmic Trading
Basic explanation of the use of algorithms to perform operations in the financial market. - Financial Analysis of Companies
Introduction to basic financial statements and their interpretation for valuing companies. - Investing in Commodities: Gold, Oil, and Other Goods
How commodity investments work and their role in diversification. - Advanced Investment Strategies: Hedging and Derivatives
Introduction to strategies for managing risks through financial derivatives. - Creating and Managing a Complete Portfolio
Practical application of prior knowledge to build and manage a diversified portfolio.
If you've ever heard of financial options and it sounded complicated, don't worry, I'll explain it to you in a super simple way. Financial options are like an agreement you make to buy or sell something, like a stock or a dollar, but not now, but in the future, and at a price you've agreed upon in advance. It's like saying to a friend: "Look, I promise I'll buy that bike from you in a month for 10,000 pesos, but if I don't want to, no problem, I'll just lose a small deposit."
Options give you the chance to decide whether you want to move forward or not, without a full commitment. This is great because it lets you play with money without risking everything, and you can even win if things go your way. We'll go step by step so you understand it well, and I'll tell you about things like Greek letters, necklaces, and butterflies, which sound strange but are easier than they seem.
How do financial options work?
Imagine you own a stock in a company, like Mercado Libre, that's worth 1,500 pesos today. With an option, you can agree to buy it in a month for 1,600 pesos, even though the actual price may go up or down by then. There are two main types: call options and put options. A call option lets you buy something if the price goes up, and a put option lets you sell if the price goes down.
For example, if you buy a call option at 1,600 pesos and the stock is worth 1,800 pesos in a month, you win because you bought it cheap and sold it expensive. If it drops to 1,400 pesos, nothing happens; you let the option expire and only lose what you paid for it, which is like a buy-in.
To exercise an option, you pay a small amount of money, called a "premium." It's like the down payment I mentioned earlier. If you pay 50 pesos for that Mercado Libre option, that's your maximum risk. If everything goes well, you can earn hundreds or thousands, but if not, you only lose those 50 pesos. The key is that you don't have to put up all the money at once, as if you were buying the stock directly. This makes it attractive for people who don't have much money or who want to try it out without taking too much risk. Options have an expiration date, such as a month or a year, and an agreed-upon price (called the "strike price"), which is what you use if you decide to exercise it.
What are the Greek letters in options?
Now we'll move on to something that sounds strange, but is simpler than it seems: the Greek letters. These are like helpers that tell you how the options will move depending on what happens in the market. Don't be scared by the names; I'll explain them easily. The Greek letters measure how the value of an option changes when things like the stock price, time, or volatility change.
First there is the DeltaImagine that the Delta tells you how much the price of your option will rise or fall if the stock moves one peso. If the Delta is 0.5, it means that if the stock rises 1 peso, your option rises 0.5 pesos. It's like a thermometer to see how much a change affects you. Then there's the Gamma, which is how the Delta changes. If Gamma is high, the Delta moves quickly, and that happens when you're close to the agreed-upon price.
Then you have the Theta, which is like a clock. It shows you how much you're losing per day as time passes and you approach expiration. If the Theta is -0.1, you're losing 0.1 pesos per day because the option is "falling apart" over time. Theta reminds you that options have expiration dates.
Then there is the Vega, which measures how the option price changes if volatility (the sharp movements in the market) increases or decreases. If Vega is 0.2, a rise in volatility of 1% causes your option to increase by 0.2 pesos. And finally, the Rho, which is less commonly used, but tells you how a change in interest rates affects you. If rates rise, the Rho tells you how much your option gains or loses.
These Greek letters sound like math, but they're like friends letting you know what's going on with your choice. You don't need to memorize them, but understanding them helps you avoid being surprised if the price moves strangely. For example, if volatility rises sharply (like in a crisis), Vega tells you that your option may be worth more, even if the stock hasn't changed much.
ITM, ATM and OTM
In-the-money (ITM), out-of-the-money (OTM), and at-the-money (ATM) options are all ways of describing the status of an option based on how its agreed-upon price compares to the current price of the asset, and are key to understanding whether or not it's worth using.
An option is “in-the-money” when it would already give you a profit if you exercised it today. For example, if you have a Mercado Libre call option with an agreed-upon price of 1,500 pesos, and the stock is now worth 1,600 pesos, you're in the money because you can buy at 1,500 and sell at 1,600, earning 100 pesos per share. The same goes for a put option: if you agreed to sell at 1,600 pesos and the stock is worth 1,500, you're also in the money. This gives you an intrinsic value in addition to the premium you paid, making it more valuable.
Then there is the "out-of-the-money" option, which is when exercising the option now is of no use to you because you gain nothing. If you have a call with an agreed price of 1,600 pesos and the stock is worth 1,500, you are "out-of-the-money" because buying at 1,600 and selling at 1,500 would make you lose money. The same goes for a put: if you agreed to sell at 1,500 pesos and the stock is worth 1,600, it doesn't make sense to exercise it because you could sell at a higher price on the market. In this case, the option only has value if the price changes before expiration; otherwise, you lose the premium.
And finally, "at the money" is when the agreed price and the current price are almost the same, as if you had a call at 1,500 pesos and the stock was worth 1,500. "At the money" means you're at the right point, with no immediate gain or loss, and everything depends on what happens next.
Knowing whether an option is in-the-money, out-of-the-money, or at the money helps you plan your moves. If you are "in-the-money," you can exercise it for a profit or sell it before maturity. If you're out-of-the-money, you have to wait for a change or let it expire, losing only the premium. And if you're at the money, it's like being on the edge: if the price moves in your favor, you can win; if not, you lose the premium.
This is key for strategies like the collar or butterfly, because you can choose options in these positions based on how much you want to risk. The idea is to look at the current price, compare it with the agreed-upon price, and decide if it's worth it, always starting with a small amount of money to learn without overcomplicating things. Logically, if the price is further out and the time is shorter, the options' prices are very low, and with a move in the right direction, we can make a lot of money. With practice, you'll better understand when an option is best for you and when it's better to pass on it.
What are necklaces and butterflies?
Now we get into something more fun: strategies like necklaces and butterflies. They're like games you set up with options to win in different ways, and I'll explain them very simply. These strategies allow you to combine options to protect yourself or seek greater profit with less risk.
Let's start with the necklaceA collar is like putting a seatbelt on your investment. Imagine you have YPF shares worth 600 pesos each. You buy a put option at 550 pesos in case the price goes down, and you sell a call option at 650 pesos in case it goes up sharply. The put protects you if it goes down, and the call limits your profits if it goes up, but because you sell the call, you get money that pays for part of the put. The necklace is good if you want to rest easy knowing you're not going to lose much, but you won't win a fortune either. It's like a shield for your actions.
Then there is the butterfly, which is like a more elaborate trick. Here you use three call options with different agreed prices. For example, you buy a call at 600 pesos, sell two calls at 650 pesos, and buy another call at 700 pesos. This creates a kind of "butterfly" because the profit graph appears to have wings. The butterfly gives you a profit if the price is close to the middle (650 pesos), but you lose if it goes too far up or down. It's a strategy for when you think the price isn't going to move much, and it lets you win if you're right. It's more complicated, but you can practice it little by little.
Another similar strategy is the straddle, where you buy a call and a put with the same agreed price, such as 600 pesos. The straddle makes you win if the price moves sharply up or down, because one of the two options will be worth a lot. It's ideal if you're waiting for a big piece of news, like a company's earnings, that could move the market. And there's the strangle, which is like the straddle but with different prices, like a 650 call and a 550 put. This is cheaper, but you need a bigger move to win.
Why use financial options?
Options are useful for several reasons, and I'll explain them easily. First, they let you earn a lot with little money, because the bonus is only a part of the total value. For example, with 50 pesos you can control a 1,500-peso stock, and if it goes up, your profit is enormous compared to what you invested. Second, they protect you if things go wrong, because you can let the option expire without losing more than the premium. Third, they give you flexibility: you can use them to buy, sell, or even implement strategies like the ones we saw.
But beware, not everything is rosy. Options are risky if you don't understand them well, because you can quickly lose the premium if the price doesn't move the way you want. They also require attention, because time is at a disadvantage with Theta. And they're more complicated than buying a stock directly, so you have to practice before diving in. The important thing is to start slowly, learn from examples, and not rush.
How to get started with options?
If you're interested in trying options, take it slow. First, find a platform that offers them, such as an online broker (in Argentina, you can check Bull Market or international platforms like Interactive Brokers). You need to open an account and learn how to use their system, which usually includes charts and options tools. Second, educate yourself: Read up on Greek letters and strategies like the necklace or butterfly in simple places or with a knowledgeable friend.
Third, start with a small amount of money. For example, invest 500 pesos in an option on a stock you know, like YPF or a Yankee like Apple. I chose a maturity not too far away, like a month, and an agreed price close to the current value. Fourth, follow the price every day and use the Greek letters to see how your option changes. If it rises as you want, sell it and take a profit; if not, let it expire. The key is to practice without fear of making mistakes at first.
An example to make it clear to you
Let's imagine Laura, a young woman who wants to try options trading. She has 1,000 pesos and chooses a stock on Mercado Libre worth 1,500 pesos. She buys a call option with an agreed price of 1,600 pesos, which expires in one month, and pays a 60 peso premium. If the stock rises to 1,800 pesos in a month, Laura exercises the option, buys at 1,600 pesos, and sells at 1,800 pesos, earning 140 pesos less the 60 peso premium, or 80 pesos in profit. If the stock falls to 1,400 pesos, she does nothing and loses only the 60 pesos. Laura learns that with little risk she can gain a lot if she gets it right.
Laura also tries on a necklace. She has YPF shares at 600 pesos, buys a put at 550 pesos, and sells a call at 650 pesos. The put costs her 20 pesos, but the call earns her 15 pesos, so she nets 5 pesos. If YPF falls to 500 pesos, she uses the put to sell at 550 pesos and saves herself. If it rises to 700 pesos, the call is exercised, and she makes up to 650 pesos. The collar gives you peace because it limits your losses and gains.
Tips to keep things simple
Before finishing, I'll leave you with some tips to help you do well. Don't rush into using options without practicing first, because you can easily lose money. Use a demo account to test strategies like the butterfly or the straddle. Always check the expiration date and the Greek letters, especially Theta, so you don't run out of time. Share ideas with other investors, but don't copy everything, because everyone has their own style.
Also avoid spending more than you can afford to lose. Start with small amounts, like 500 or 1,000 pesos, and increase when you feel confident. And finally, learn little by little: watch videos, read examples, and ask questions if something doesn't make sense to you. With patience, options can be a fun and useful tool for your money.
The risks
Financial options may seem like an attractive way to make money quickly, but they carry risks, and you have to be careful. One of the biggest dangers is that you can lose everything you paid for the option (the premium) if the price doesn't move as you expected. For example, if you spend 1,000 pesos on a call option thinking a stock will rise, but it falls or stays put until expiration, those 1,000 pesos are wasted. This happens quickly if you don't understand how the market works or if you don't have a clear plan, and many people get frustrated because they expected easy profits without properly assessing the risks.
Another problem is that options are very sensitive to time and market changes, and that can work against you. Theta, one of the Greek letters, shows you what you lose every day that passes, because options have an expiration date and the closer you are to that date, the less they are worth if they don't move.
Also, if there are sudden movements (volatility) that you didn't anticipate, you could lose even if the price moves slightly in your favor, because Vega and other Greek letters affect the value in ways that aren't always easy to understand. It's important to remember that, like any stock market instrument, beyond its theoretical price, which the Greek letters can give you, the price is always set by a counterparty, which means that unless you exercise the option, you'll always be dependent on someone buying or selling it to you. These factors make options trading complicated if you're inexperienced or don't know how to handle your emotions when things don't go your way.
Finally, options can be addictive and lead you to make impulsive decisions. Since they let you win a lot with little money, it's easy to fall into the temptation of betting more than you can afford to lose, thinking you're going to hit a big jackpot.Many people go into debt or use money they needed for other things because they get excited about the idea of "getting rich quick." Also, if you use more advanced strategies like the straddle or butterfly without fully understanding them, you can lose more than you expected. Therefore, it's key to start with little money, practice calmly, and not let your emotions get the better of you, because options are risky if you don't manage them carefully.
To close: Options are your game
Financial options are like a strategic game where you can win a lot with little, using tools like Greek letters, necklaces, and butterflies. They give you the flexibility to buy or sell based on how the market moves, and they protect you if things don't go as you expected. It's not for everyone, because it requires attention and practice, but if you like to learn and aren't afraid of taking small risks, you can make the most of it. With a little effort, you can start getting the hang of it and see how your money grows. Are you up for it? It's easier than it seems when you take it step by step.
Next course date
Questions for you to reflect on
Why is it important to understand the risks of options?
Can the "Buy and Hold" philosophy be implemented with these instruments?
What happens if expiration is approaching and I have OTM calls?
A brief overview of The Pocket Investor
The Pocket Investor is a project that combines experience and passion for financial education to help you transform your relationship with money. Through personalized mentoringWe help you design investment strategies tailored to your goals and needs, optimizing your portfolio to address challenges like inflation and the dollar.
The books on finance and investment, including the popular The Argentine Pocket Investor - El Inversor de Bolsillo argentino, are practical tools that explain complex concepts in a simple way, bringing the world of investments closer to anyone interested in financial growth.
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