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Preface to the NO1.
It is a fascinating financial derivative, which can both provide a good hedge for traders and improve the return on investment, and has become one of the fastest growing financial instruments.
Introduction to NO2.
The financial media, which are aimed at financial institutions or general investors, tend to teach people safer ways to invest while hiding some unpopular ways to invest so as not to cause controversy. Yet history has repeatedly shown that the biggest winners are those who venture into the unknown.
For example, with Bitcoin in the pioneer days, even the simplest trend-following strategy would have made you a fortune by now.
Most academics and brokers would say that put options are an extremely risky investment method. They advise against this strategy because the risks are difficult to measure. However, prices will go up and down, that is the nature of the market. Even a “paper loss” is a loss.
NO3. What is an option
An option is the right to buy or sell a specified amount of a specific commodity at a specified price at a specified time in the future.
An option is not some esoteric trading privilege, it is essentially an insurance policy, not complicated at all. Options are applicable to any commodity with price fluctuations, of course, the stock is no exception, no matter long or short, the use of options, equivalent to a more diffuse risk protection.
Three years of labor, that’s the price of the option, that’s the insurance policy.
The right to marry the village chief’s daughter is the right to sell or buy the underlying asset at a particular price. When you meet the girl you love more, it’s better to buy the underlying asset at the market price than at the option price.
NO4. Option terminology
Margin: The amount of money an option obligator must pay in accordance with the rules in an option transaction. The maintenance margin is calculated daily.
Premium rate: the price of share rises even how much percentage just can let subscribe authority card holder achieve balance of profit and loss, or even drop how much percentage just can let recognize buy authority card holder achieve balance of profit and loss. Premium is one of the indicators to measure the risk level of warrants. Generally speaking, the higher the premium, the more difficult it is to reach break-even and the higher the risk.
Implied volatility: refers to investors’ perception of future volatility when trading options, and this perception has been reflected in the pricing process of options.
Intrinsic value: the value of an option, if exercised immediately, can only be positive or zero. The intrinsic value and time value together constitute the total value of the option.
Time value: The likelihood that the underlying price of the contract will change in favor of the option holder during the remaining life of the option. Time value and intrinsic value together constitute the total value of options.
Option premium: Option premium = intrinsic value + time value.
Strike price: refers to the trading price of the underlying contract at which the option holder exercises the option as specified in the option contract.
NO5. Option contract elements
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American option. American options can be exercised at any time between the purchase date and the expiration date. The previous example of company A options is an American option. Most exchange-traded options are of this type.
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European option. European options can only be exercised at maturity. American and European options have nothing to do with geography.
NO6. Options VS futures
Both options and futures are based on forward delivery contracts, which provide price protection against market fluctuations. The main differences between the two are as follows: the target of futures trading is commodity futures contract; The object of option trading is a right.
NO7. Option strategy
Here’s the point
1. Long Call
②, The maximum profit is unlimited (theoretically).
(3) Limited maximum loss (option expense).
(4) Profit at expiration (assuming the stock price is higher than the break-even point) : price – strike price – option premium.
⑤, the impact of volatility: the impact of volatility on option prices occurs in the part of time value when volatility increases to positive and decreases to negative.
2. Long Put
①, market judgment: bearish.
②, The maximum profit is unlimited (theoretically).
(3) Limited maximum loss (option expense).
(4) Profit at expiration (assuming the price is lower than the break-even point) : strike price-price-option premium.
⑤, the impact of volatility: the impact of volatility on option prices occurs in the part of time value when volatility increases to positive and decreases to negative.
3. Bull Call spread
(1) Market judgment: moderate bullish to bullish.
②, maximum profit: limited (strike price difference – net paid expenses).
(3) Maximum loss: limited (net expenses paid).
(4) Break-even point: the strike price of the call option + the net paid expense.
⑤, the impact of volatility: the net effect of the fluctuation of the underlying price volatility on this strategy is complicated, which depends on whether the long and short options are in-the-money or out-of-the-money, and how much time remains before expiration.
4, Bear Put Spread
(1) Market judgment: moderate bearish to bearish.
②, maximum profit: limited (strike price difference – net paid expenses).
(3) Maximum loss: limited (net expenses paid).
(4) Break-even point: the strike price of the call option – the net paid expense.
⑤, the impact of volatility: the net effect of the fluctuation of the underlying price volatility on this strategy is complicated, which depends on whether the long and short options are in-the-money or out-of-the-money, and how much time remains before expiration.
NO8. Option trading
Whether an investor chooses to sell a call or a put, he is making a promise to the buyer that he will sell or buy the price when the buyer decides to exercise his right.
The key to making money for an investor selling options is the word “potential.” When used correctly, investors who sell options can make a lot of money.
To make money by selling an option is to make a “short promise” to the buyer of the option. The more ‘short promises’ investors make in the stock market, the more money they can make.
Example 1:
Soybean meal is currently trading at $2600 and we assume it will reach $2900, so we sell the May call at $300.
When the option expires in May, our call option will become worthless if the soybean meal price falls below $2900. The seller will earn $300 by selling the call option.
Example 2:
The 50ETF is currently trading at $2.85 and we assume it will fall to $2.50, so we sell the December expiry put option at $0.05.
When the option expires in December, if the price of the 50ETF is above $2.50, our put option will become worthless. The seller will earn $0.05 by selling the put option.
When the buyer exercises the option, the seller cannot refuse. The seller is similar to the insurance company that collects the premium from the insured. When the insured claims, the insurance company must pay the policy amount.
However, it is well known that most policies expire unclaimed. The same goes for options. Investors who sell options are like insurance companies in the stock market.
With the right numbers, investors can profit by selling options. The point is that investors have to manage risk well, otherwise it is very risky.
NO9. Special tips
The only constant in the market is that it is always changing and the future is unpredictable. Investment is risky and entering the market should be cautious.