Financial derivatives such as options are financial instruments that allow an investor to invest on an underlying asset without actually buying it. Derivatives allow investors profit whether the price of the underlying asset rises or falls.

Underlying assets could be currencies, commodities such as crude oil, and shares of companies quoted on a stock exchange. Derivatives are powerful tools for risk management used by investors to protect their exposure in the underlying asset. This works by buying or selling financial options that protect their portfolios from losses.

Derivatives are traded on derivatives exchanges(similar to stock exchanges) or over the counter (OTC) arrangements which are privately negotiated agreements between counterparties who are willing to transfer risk amongst themselves.

I am developing such an OTC arrangement and am welcome to questions, suggestions etc from interested NL's on this.

boss ur write is too technical for a lay man to understand pls do kindy simplify it.i must confesss i am interested

TRADE IF YOU WANT TO TRADE.... CONSIDERS OPENING ACCT WITH APEX FUTURES OR MFG CAPITAL... OR INTERACTIVEBROKERS... AND LEAVE OTC FOR BIG TRADERS... IN ANY TRADING, YOU NEED VOLUMES... ITS BETTER YOU STICK TO ASSETS CLASS SUCH AS EUR/USD, SOYABEANS, CRUDE OIL AND S&P 500... THESE ASSETS CLASS GENERATES VOLUMES... I CAN HELP YOU IN ANYWAY ON THIS, JUST EMAIL ME @ OLUSHOWUNMI2@GMAIL.COM...

***NOTE: ALL IN SMALL LETTERS, DON'T MIND MY CAPS TYPING!***

onatisi: boss ur write is too technical for a lay man to understand pls do kindy simplify it.i must confesss i am interested

I am glad you are interested..to trade financial options,I have removed most of the technicalities so that ordinary Nigerians can trade. The first question is are you willing to commit time to learn the rudiments? If yes. Watch this space for daily training on financial options as. Championed by my company Sevesa nig. Ltd

LESSON ONE
An option is a right but not an obligation to buy(call option) or sell(put option) an underlying asset(share of a company,crude oil or currency) on or before a given date at a pre-agreed price. So for instance the shares of cadbury closed on friday at N39.18K. As an investor,you may feel that the stock will rise.to protect your cadbury shares, you can buy a put option to sell your cadbury shares incase the price drops in the next thirty days

If the price of cadbury continues to rise, you won't exercise the option to sell your cadbury shares and will only loose the option price paid. If however the price of cadbury falls below N30, to say N27,you will exercise the put option by selling @ N30 and earning a profit of N3 per share.

Options just as other derivatives are tools of risk management in financial markets. Till the next lesson

@OP, thanx 4 d lesson. God bless u.

LESSON TWO
Financial options are powerful tools that investors use to leverage information or expertise they have regarding different underlying assets. by trading options, investors can make a profit whether the underlying asset price rises or falls. the beauty of financial options is that one does not need to own the underlying asset to trade on an option for the underlying. what this means is that i can trade options of Nestle shares(the underlying) whether or not i have Nestle shares in my portfolio! i only use the price of the underlying asset as a reference point for my investment in the Nestle options.

financial options have the following advantages;
1. Leverage
2. Liquidity
3. Risk management
4. cheap

Leverage; options are priced for a fraction of the cost of the underlying. therefore one can buy an option for a stock that is trading on the nigeria stock exchange for say N14 for just N2 depending on the negotiation with a counterparty. therefore with a capital outlay of N1400, an investor will buy 100 units of the stock on the floor of NSE. with the same capital, the investor can buy 700 options for the same underlying. Now if the investor buys a call option to buy the stock of the company for N12 within 30 days, he can make a profit if he exercises the option when the underlying is sold on the stock exchange for say N18.

compare an investor who buys the underlying and makes a profit of N3*100 units=N300. while the investor in options makes N3*700=N2100. the ROCE for the first investor is 21.43% while the investor in options has a return of 150%!.This type of return is typical of derivatives transactions

Liquidity; with financial options, an investor is not limited by supply conditions of the underlying asset. for instance how many nigerians know where to buy/trade crude oil by the barrel? am not sure there are many.however, an investor can go into a financial option transaction that has crude oil as the underlying. what the investors in the transaction do is simply to use the price of the crude oil as a reference for the transaction and at maturity, they simply cash settle the transaction by closing out the transaction by cash without actually delivering the underlying.

Risk management; derivatives such as financial options are used by investors to hedge(protect) their investment in the underlying asset. thus if an investor has an investment in say Dangote cement shares, he can protect his portfolio from a price loss by selling a put option for a price lower than the current market price. if the market price falls, and the buyer of the option exercises it, he will sell at a price less than market price but which may have been his exit target. therefore, his loss is minimised by the premium(price) he obtained for selling the put option.

similarly, the investor can sell both a call and put option on the share to limit his downside loss and earn a target upside profit

Cheap; as stated in an example above,options are cheaper than the underlying asset and enable smaller investors take positions in various underlying assets that may be too small to invest on organised stock exchanges for the underlying.

till the next lesson. cheers

I UNDERSTAND USING THE NIGERIAN EXAMPLES, BUT IT WILL MAKE SENSE TEACHING WITH PRACTICALITY SINCE WE ALL KNOW THAT NO DERIVATIVES ON NSE... ANYWAY KEEP UP THE LESSONS!

So which app do you use for stock options trading, that accepts Nigerians?

Which app do you use to trade stocks options, as a Nigerian?