Option refers to a contract that gives the holder the right to buy or sell assets at a fixed price on or before a certain date. The key points of option definition are as follows:

The right to choose is a right. An option contract includes at least a buyer and a seller. The holder enjoys power, but does not assume corresponding obligations.

2. The object of the option. The subject matter of an option refers to the assets you choose to buy or sell. Including stocks, national debt, currency, stock index, commodity futures and so on. Options are derived from these subject matter, so they are called derivative financial instruments. It is worth noting that the option seller does not necessarily own the underlying assets. Options can be "short". Option buyers may not really want to buy the underlying asset. Therefore, when the option expires, both parties do not have to make physical delivery of the subject matter, but only need to make up the price according to the price difference.

3. Due date. The expiration date of the option agreed by both parties is called "expiration date", and if the option can only be executed on the expiration date, it is called European option; If an option can be exercised at any time on or before the expiration date, it is called an American option.

4. Execution of options. The act of buying and selling the underlying assets according to the option contract is called "execution". The fixed price agreed in the option contract for the option holder to buy and sell the underlying assets is called the "exercise price".

Option classification:

Due to the different trading methods, directions and targets of options, many options have been produced. Reasonable classification of options is more conducive to our understanding of option products.

Divide by rights

According to the rights of options, there are two kinds: call options and put options.

According to the types of options, it can be divided into European options and American options.

According to the exercise time, it is divided into three types: European option, American option and Bermuda option.

1. For European options, the buyer can choose to exercise the right after the market opens on the exercise date and before the exercise deadline.

2. For American options, the buyer can choose to exercise before the exercise deadline on the exercise date within the trading period after the transaction.

CallOptions means that the buyer of the option has the right to buy a certain number of specific commodities from the option seller at a pre-agreed price within the validity period of the option contract, but he is not obliged to buy them. The option seller is obliged to sell the specific commodities specified in option contracts at the price specified in advance at the request of the option buyer within the validity period specified in option contracts.

For example:

(1) call option: 65438+ 10/,the subject matter is copper futures, and the exercise price of the option is 1 850 USD/ton. A buys this right and pays $5; Sell this right and get 5 dollars. In February 1, copper futures price rose to 1905 USD/ton, and call option price rose to 55 USD. A can adopt two strategies:

Exercise-A has the right to press 1.

Buy copper futures from B at a price of $850/ton; After A puts forward the requirement of this exercise option, B must meet it. Even if B doesn't have copper, it can only buy it in the futures market at the market price of 1.905 USD/ton, and sell it to A at the exercise price of 1.850 USD/ton, while A can sell it in the futures market at the market price of 1.905 USD/ton, making a profit of 50 USD/ton (654,300. B will lose $50/ton (1850- 1905+5).

Put right-A can sell a call option at a price of $55, and A earns $50/ton (55-5).

If the copper price falls, that is, the copper futures market price is lower than the final price 1850 USD/ton, A will give up this right and only lose the royalty of 5 USD, while B will gain a net profit of 5 USD.

PutOptions: The option buyer has the right to sell a certain number of specific commodities specified in the option contract to the option seller at a pre-agreed price, but he is not obliged to sell these commodities. The option seller is obliged to purchase the specific commodities specified by option contracts at the price specified in advance at the request of the option buyer within the validity period specified by option contracts.

(2) Put option: 65438+ 10 month 1, and the strike price of copper futures is 1750.

USD/ton, A buys this right and pays USD 5; Sell this right and get 5 dollars. In February 1, copper price fell to 1695 USD/ton, and put option price rose to 55 USD/ton. At this point, A can adopt two strategies:

Exercise 1 1 1A can buy copper from the market at the middle price of 1695 USD/ton and sell it to b at the price of 1750 USD/ton. B must accept that A gains $50/ton (1750- 1695-5) and B loses $50/ton.

Put option -A can sell the put option for $55. A The profit is USD 50/ton (55-5).

If the copper futures price rises, A will give up this right and lose $5 in royalties, while B will gain $5 in net profit.

Through the above examples, we can draw the following conclusions: First, as the buyer of options (whether call options or put options), there are only rights but no obligations. His risk is limited (the biggest loss is royalties), but theoretically his profit is unlimited. Second, as a seller of options (whether call options or put options), he has only obligations but no rights. Theoretically, his risks are infinite, but his income is limited (the biggest income is royalties). Third, the seller of the option does not need to pay a deposit, but the buyer must pay a deposit as a financial guarantee for fulfilling the obligation.

Option is an important hedging derivative tool to meet the needs of international financial institutions and enterprises to control risks and lock in costs.