An options contract is a significant derivative tool in financial and commodity investments, helping investors protect their assets and increase potential profits from price fluctuations. However, not everyone fully understands how to leverage options contracts to maximize returns and manage risks. In this article, SFVN will guide you through the basics of options contracts, from definitions and benefits to when and how to use them, answering common questions and providing a comprehensive view of this investment tool.

Learn what options contracts are to maximize investment benefits

What is an Options Contract?

An options contract is a financial derivative tool that grants the holder the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a specified price (strike price) on or before the contract’s expiration date. The unique aspect of options contracts is that the buyer has the right, not the obligation, to execute the transaction, allowing flexibility and risk mitigation for investors.

In detail, there are two main types of options contracts:

• Call Option Contract: Allows the buyer to purchase the underlying asset at a predetermined price.

• Put Option Contract: Allows the buyer to sell the underlying asset at a predetermined price.

Examples of options contracts: Suppose you anticipate that oil prices will rise sharply over the next six months, up to 60 USD per barrel. You can purchase a call option contract on crude oil with a strike price of 75 USD per barrel, along with paying an option premium. When the price of oil increases as expected, you can exercise the option to buy oil at the lower price, then sell it at a higher price for profit.

Options contracts provide flexibility and safety for investors in volatile markets

Who Should Use Options Contracts?

Options contracts are suitable not only for professional investors but also for a variety of individuals with different needs. The following are the groups who might benefit:

• Individual Investors: Individuals with experience in financial or commodity investments can use call and put options to maximize profits and protect investments. Options contracts offer investors flexibility and lower risk by not obligating them to execute the transaction.

• Businesses with Hedging Needs: Companies heavily dependent on raw materials or commodities, such as agriculture, metals, or energy sectors, can use options contracts to "lock in" input costs.

• Speculators and Investment Funds: Speculators can take advantage of options contracts to profit from market price fluctuations without holding the underlying asset. Options are also useful tools for investment funds aiming to diversify portfolios and minimize risk in derivative investments.

Options contracts enable investors and businesses to manage price risk and maintain flexibility in their investment strategies

Where are Options Contracts Traded?

In Vietnam, options contracts can be traded centrally at the Vietnam Commodity Exchange (MXV). Additionally, investors can participate through reputable derivatives brokerage firms such as SFVN Investment Joint Stock Company, which offers trading support for options contracts and other derivatives. These exchanges provide transparent, safe trading environments, making it easy for investors to access and seize opportunities in the derivative commodity markets.

Trade options contracts safely on trusted exchanges

When Should You Use an Options Contract?

Choosing the right timing to use an options contract is key to optimizing profits and minimizing risks. Typical scenarios include:

• When predicting significant future price volatility: If you expect the market to fluctuate significantly, using an options contract can help protect assets. Commodities like oil, metals, and agricultural products often experience price volatility, impacting investor profits.

• When hedging raw material costs: For instance, if you’re an ingredient-importing manufacturing company, a call option on oil can help maintain stable pricing and improve financial planning.

• When the market is in a downturn: If you predict a market downturn, you can choose a put option, allowing you to profit even as prices decline.

Timing options contracts correctly to maximize benefits

Why Use an Options Contract?

Increase Profit Potential

By capitalizing on price fluctuations, options contracts enable investors to seize profit opportunities. The leverage in options can also increase potential returns with a smaller initial investment.

Effective Risk Hedging

Both businesses and individual investors can use options contracts to hedge risks. For example, a put option can protect against losses if oil prices drop significantly.

Flexibility and Adjustability

Options contracts allow investors greater control in adjusting their investment strategy. Investors can choose to execute options when profitable or hold off if they don't meet their profit objectives, minimizing risk effectively.

Develop Diverse Investment Strategies

Combining options with other tools enables investors to develop diverse strategies. Popular strategies include combined call-put strategies, spread strategies, or protective options, all designed to minimize risk while maximizing profit potential.

The Current Status of Options Contracts in Vietnam

In Vietnam, options contracts are gaining attention from both individual and corporate investors. Major exchanges like MXV now support trading of popular options contracts. As the market continues to grow, options contracts are poised to become an essential tool for investors in the future.

Options contracts help protect and increase profits for investors

Conclusion

Options contracts are versatile financial instruments that help investors and businesses manage risks effectively and optimize returns. With their flexibility and efficiency, options contracts are a smart choice for investors aiming to capitalize on price fluctuations in derivative commodities.

Register for a commodity derivatives trading account at SFVN today!