Trading Forsa Options

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Trading Forsa Options

Forsa option contracts are traded in the secondary market on a number of listed stocks at the Kuwait Stock Exchange. The contracts are legal and between the market maker (Forsa Fund) and the Option Buyer (Investor). By this contract, Forsa Fund confers the option buyer the right but not the obligation to buy (Call options) a specific number of stocks at a specific price called the strike price on or before a specific date called the expiration date in consideration for a specific amount called the premium paid by the option buyer to Forsa Fund.

At any time during the contract, the option buyer may exercise his right to buy the underlying stocks from Forsa Fund at the strike price. If the investor does not exercise the option during the term of the contract, the validity of the contract will end on the expiration date.

In order to provide the necessary liquidity to the market, the market maker (Forsa Fund) quotes daily ask and bid prices to all the option contracts it writes for a purpose of creating a trading environment that confers the investor the opportunity to sell or exercise the contract.

 

Call Option example

 
Assume a call option contract written by Forsa Fund on 30-April-2005 has the following terms:

Underlying Stock   National Bank of Kuwait (NBK)
Strike price   1400 Fils
Quantity   10,000
Expiration date   29-June-2005
Ask price   66 Fils
Bid Price   61 Fils

                      

The buyer of this contract on 30-April-2005 has to pay to the market maker (Forsa Fund) a premium amount of KD. 660/-.

Suppose the stock price at 22-May-2005 increased to 1500 Fils, the Ask price increased to 142 Fils and the Bid price 137 Fils. So the option buyer can settle his contract as below:

 
  1. Sell the option back to the market maker at the Bid price (137 Fils). A profit of 71 fils (137-66) or 108% is realized.
Or
  1. Buy 10,000 stocks of NBK from the market maker at the strike price of 1400 Fils per stock. In this case, the option buyer pays KD. 14,000/- to the market maker without the deduction of the premium paid (KD. 660/-). A net profit of KD 440 is realized after paying the option premium


On expiration date, if the stock price remains at KD 1.5 00 and the option buyer does not exercise the option contract, it will automatically be paid the cash settlement amount of KD 1,000 ((KD 1.500 settlement price – 1.400 strike price) x 10,000 shares).  The option buyers profit would be the KD 1,000 settlement less the premium paid of KD 660, meaning a net profit of KD 440.