Options
Overview
Options are financial instruments that are derivatives or based on underlying securities such as stocks.
Unlike futures, the holder is not required to buy or sell the asset if they choose not to.
Each option contract will have a specific expiration date by which the holder must exercise their option.
The stated price on an option is known as the strike price.
Buyer of an option has the right but not an obligation. The seller of an option is obligated to execute the option when the buyer chooses so.
Used for hedging and speculation.
An options contract offers the buyer the opportunity to buy (call option) or sell (put option) the underlying asset within a specific timeframe.
Create the option security
Define your call and put options as securities of the type Option - each option should have its own security defined in the system. For each option security
Under basic information, define the basic information of your option and link your option to the underlying security, e.g. the security you would be buying / selling when exercising the option.
Under extra information, define the issue date as well as the maturity date as the expiration date of the option and the maturity price as the strike price of the option.
Managing options in FA
Find below instructions for the two different option scenarios, call (buy) options and put (sell) options, and how to manage them in FA. Managing options involves two steps: buying the option into your portfolio, and exercising the option when the option is terminated. Managing your call and put options with these instructions ensure that you will get correct effects to your portfolio's value and key figures, as well as allow you to construct appropriate bookkeeping rules to record your option investment correctly to bookkeeping as well.
Call options
A trader who expects a stock's price to increase can buy a call option to purchase the stock at a fixed price ("strike price") at a later date. In FA, call options can be managed through the following steps
Buy or Sell the call option to your investment portfolio(s).
Create a new transaction of the type "option", and create a regular "buy" (to open a long position) or "sell" (to open a short position) transaction of your call option security.
Record the amount and unit price according to how many options you bought and how much you paid for them.
Exercise the call option in your investment portfolio(s).
Create a new transaction of the type of the security you are buying with the option (e.g. for stock options, create a transaction of the type "stock"). Use the transaction type "Exercise call" for exercising a call option.
Record the amount and strike price (unit price) according to the option agreement.
At the bottom of the window, record the options you used for exercising the call as the second security of the transaction and define the ratio according to how many shares you bought with your options.
=> Exercising a call option removes the option securities from your portfolio, and adds the securities you purchased to the portfolio with the correct purchase price of amount * strike price + option premium. Your cash balance is deducted by amount * strike price, since the option premium was already deducted from your account when you bought the call options.
Put options
A trader who expects a stock's price to decrease can buy a put option to sell the stock at a fixed price ("strike price") at a later date. In FA, put options can be managed through the following steps
Buy or Sell the put option to your investment portfolio(s).
Create a new transaction of the type "option", and create a regular "buy" (to open a long position) or "sell" (to open a short position) transaction of your put option security.
Record the amount and unit price according to how many options you bought and how much you paid for them.
Exercise the put option in your investment portfolio(s).
Create a new transaction of the type of the security you are buying with the option (e.g. for stock options, create a transaction of the type "stock"). Use the transaction type "Exercise put" for exercising a put option.
Record the amount and strike price (unit price) according to the option agreement.
At the bottom of the window, record the options you used for exercising the put as the second security of the transaction and define the ratio according to how many shares you sold with your options.
=> Exercising a put option removes the option securities from your portfolio, and deducts the securities you sold from the portfolio with the correct selling price of amount * strike price - option premium. Your cash balance is increased by amount * strike price, since the option premium was already deducted from your account when you bought the put options.
Options and corporate actions
Options are managed most conveniently in FA by creating the appropriate transactions manually to your portfolios - this way you are able to record all necessary values, including the option premiums, to your transactions at once.
However, if you are managing an option in multiple portfolios, you can mass-generate the exercise transactions without the option premiums to your portfolios with the help of a corporate action of the type "Subscription": choose your option as the "security" and the security you are getting as the "issued security", and define the "date", "price", "ratio" and "transaction type" according to the option exercise information. NOTE that creating the exercise transactions through the corporate action DOES NOT add the option premiums to the transactions, and you would need to add the portfolio-specific option premiums manually to your transactions afterwards one by one!