An option refers to a contract that gives the option buyer the right to buy or sell the underlying securities or assets from the option seller at an agreed price within a specific period or a specific expiration date, or to collect the financial products with cash to settle the difference.
The essence of option reflects a contractual relationship between buyer and seller. The option buyer obtains a right from the option seller after paying a certain amount of royalties to the option seller. This right enables the buyer to buy/sell a certain amount of assets from the option seller at an agreed price on a specific date or within a specific period in the future. Options to buy stocks are called "call options" and options to sell stocks are called "put options". Call option is equivalent to "call option" in commodity options and put option is equivalent to "put option" in commodity options. The option buyer has the right to decide whether to perform the contract or not, while the option seller has to perform the obligation, so in order to obtain this right, the buyer has to pay a certain price (royalty).
The option value consists of two parts. First, the connotation value, that is, the difference between the underlying stock or asset and the exercise price; The second is time value, which represents the holder's expectations and opportunities brought about by future asset price fluctuations. Other things being equal, the longer the term of the option, the higher its price.
Because options are also a T+0 trading system, many investors think that options and stock index futures trading are very similar, but they are not, and the difference between them is still very big.
(a) The risks they face vary greatly.
First of all, stock index futures adopt the margin system, with unlimited profit and loss space. Option buyers only bear limited risks, even the biggest loss is only the loss of all royalties; However, because the seller of the option has the obligation to perform the contract, there are theoretically limited gains (that is, the collected royalties) and unlimited losses, and the rights and risks of the buyer and the seller are not equal.
(b) The calculation methods are different.
The daily price fluctuation range of stock index futures is set according to certain standards. For example, the daily maximum price fluctuation of Shanghai and Shenzhen 300 stock index futures is limited to 10% of the settlement price of the previous trading day, and the daily price increase and decrease of the last trading day is limited to 20% of the settlement price of the previous trading day. The formula for calculating the daily fluctuation range of options is often complicated, which usually includes the price of the underlying stock or asset, because the price of options is mainly determined by the price of the underlying stock. Small changes in the underlying stock price may cause large changes in the option price, so the profit and loss range of options is usually much larger than that of stocks or stock index futures.
For example, the price calculation formula of SSE 50ETF option contract is as follows:
Option contract price = option contract settlement price plus or minus the maximum price limit.
In which: the maximum increase of call option = max {the former closing price of the contract target ×0.5%, min \[(2× the former closing price of the contract target-exercise price), the former closing price of the contract target \ ]× 10%}
Moreover, the maximum decline of the call option = the previous closing price of the contract target × 10%.
Maximum increase of put option = max {exercise price ×0.5%, min\[(2× exercise price-previous closing price of contract target \] × previous closing price of contract target +00%}
Moreover, the maximum decline of the put option = the previous closing price of the contract target × 10%.
(3) Different delivery methods at maturity.
Stock index futures contracts should be delivered in cash when they expire. The expiration of options involves the physical delivery of stocks or the delivery of commodity futures contracts. For example, the delivery of SSE 50ETF options refers to the delivery of a specified number of SSE 50ETF shares by buyers and sellers, while the exercise of corn and other commodity options means that buyers and sellers get the corresponding corn futures long or short contracts, and both delivery parties have to deposits received in their respective accounts in advance before making futures, which is more troublesome. When the delivery expires, the option buyer can choose to exercise or give up the exercise. When the option buyer chooses to exercise, the option seller has the obligation to meet the option buyer's exercise requirements.