Option refers to the right to buy and sell in a certain period of time in the future. It is the buyer's right to buy (call option) or sell (put option) a certain number of specific subject matter from the seller at a predetermined price (strike price) in a certain period in the future (American option) or a certain date (European option), but it has no obligation to buy or sell. Option trading is actually the trading of such rights. The buyer has the right of execution and the right of non-execution, and can choose flexibly.
Second, the basic elements of the option contract
The so-called option contract means that the option buyer pays a certain amount of royalties to the option seller, that is, a standardized contract that obtains the right to buy or sell a certain number of related commodity futures contracts at the pre-agreed final price within the specified period. The elements of option contract mainly include the following points: buyer, seller, royalty, final price, notice and expiration date.
Three. Type of option
According to the rights of options, there are three main types: call options, put options and two-way options.
(1) call option. The so-called call option means that the buyer of the option has the right to buy a certain number of related commodity futures contracts at a specific finalized price within the specified validity period, but at the same time has no obligation to buy them.
(2) Put option. The so-called put option means that the buyer of the option has the right to sell a certain number of related commodity futures contracts at a specific finalized price within the specified validity period, but at the same time has no obligation to sell.
(3) Two-way selection. The so-called two-way option means that the buyer of the option not only has the right to buy a certain number of related commodity futures contracts at a specific strike price within the specified period of validity, but also has the right to sell a certain number of related commodity futures contracts at the same strike price within the agreed period of validity.
Fourth, the performance of options.
Option performance has the following three situations.
1. Both buyers and sellers can perform the contract by hedging.
2. The buyer can also perform the contract by converting the option into a futures contract (obtaining the corresponding future positions at the execution price level stipulated in the option contract).
3. Any expired unused options will automatically become invalid. If the option is virtual, the option buyer will not exercise the option before the option expires. In this way, the option buyer loses the premium paid at most.
Verb (abbreviation for verb) option premium
As mentioned earlier, the option premium is the price of buying or selling the option contract. For the option buyer, in exchange for giving the buyer some rights, he must pay royalties to the option seller; For the seller of options, he sells options and undertakes to fulfill the obligations of option contracts, for which he receives a royalty as a reward. Because the patent fee is borne by the buyer, it is the highest loss that the buyer needs to bear when the most unfavorable change occurs, so the patent fee is also called "insurance money".
VI. Principles of Option Trading
When you buy a fixed-price call option and pay a small premium, you can enjoy the right to buy related futures. Once the price really rises, you will exercise the call option to get the futures long position at a low price, and then sell the relevant futures contracts at a high price according to the rising price level, get the profit of the difference, and make up the paid royalties to make a profit. If the price does not rise but falls, you can give up or transfer the call option at a low price, and the biggest loss is the premium.
The buyer of the call option buys the call option because it is determined that the price of the relevant futures market is likely to rise sharply through the analysis of the price changes of the relevant futures market, so he buys the call option and pays a certain premium. Once the market price really rises sharply, he will get more profits by buying futures at a low price, which is greater than the amount of royalties he paid for purchasing options, and finally make a profit. He can also sell option contracts at a higher premium in the market, thus hedging profits.
If the call option buyer is not accurate in judging the price trend of the relevant futures market, on the one hand, if the market price only rises slightly, the buyer can perform or hedge, get a little profit and make up for the loss of royalties; On the other hand, if the market price falls and the buyer fails to perform the contract, the biggest loss is the amount of patent fees paid.
Seven. The Relationship between Option Trading and Futures Trading
There are differences and connections between option trading and futures trading. The connection is:
First of all, both are transactions characterized by buying and selling forward standardized contracts;
Secondly, in the price relationship, the futures market price has an influence on the final price and premium of the option trading contract. Generally speaking, the final price of option trading is based on the delivery price of forward transactions of similar commodities determined in futures contracts, and the difference between them is an important basis for determining the premium;
Third, futures trading is the basis of option trading, and the content of trading is generally the right to buy or sell a certain number of futures contracts. The more developed futures trading is, the more basic options trading is. Therefore, the mature futures market and complete rules create conditions for the emergence and development of option trading. The emergence and development of option trading provide hedgers and speculators with more options for futures trading, thus expanding and enriching the trading content of the futures market;
Fourth, futures trading can be short, and traders do not necessarily make physical delivery. Option trading can also be long and short, and the buyer does not have to actually exercise this right, but can also transfer this right as long as it is beneficial. The seller does not have to perform, but he can relieve his responsibility by buying the same option before the option buyer exercises his rights. Fifth, because the subject matter of the option is the futures contract, both the buyer and the seller will get the corresponding future positions when the option is executed.