option (option; Option contract, also known as option, is a derivative financial instrument based on futures. In essence, the option is to price the rights and obligations separately in the financial field, so that the transferee of the right can exercise his rights on whether to trade or not within a specified time, and the obligor must perform it. In the transaction of options, the party who buys options is called the buyer, while the party who sells options is called the seller; The buyer is the transferee of the right, and the seller is the obligor who must perform the buyer's right.

table of contents [hidden ]

option characteristics and classification

basic factors of option contract

principle of option trading

relationship between option trading and futures trading

function

risk indicator

difference between option and futures

option-risk indicator

[ edit this paragraph] option characteristics and classification

options can be mainly divided into Call Option and Put Option, the former is also called call option or call option, and the latter is also called put option or put option.

Option trading is actually the trading of this right. The buyer has the right to execute and the right not to execute, so he can choose flexibly. Options are divided into off-site options and on-site options. OTC options trading is generally reached by both parties to the transaction.

Option, which is in futures [1]? 1? A financial instrument based on 3. In essence, the option is to price the rights and obligations separately in the financial field, so that the transferee of the right can exercise his rights on whether to trade or not within a specified time, and the obligor must perform it. In the transaction of options, the party who buys the options is called the buyer, while the party who sells the contracts is called the seller. The buyer is the transferee of the right, and the seller is the obligor who must perform the buyer's right. The specific pricing problem is discussed comprehensively in financial engineering. Options are divided into call options and put options.

The English-Chinese Dictionary of Securities Investment by the Commercial Press explains: Also called option contract. Option contract a trading contract in which financial derivatives are used as exercise varieties. Refers to the right to buy and sell a certain number of trading varieties at a specific price within a specific time. The buyer or holder of the contract has the right by paying the deposit-option premium; The contract seller or the right holder (writer) collects the option fee, and when the buyer wishes to exercise the right, he must fulfill his obligations. Option trading is an auxiliary means of investment behavior. When an investor is optimistic about the market outlook, he will hold a call option, while when he is bearish on the market outlook, he will hold a put option. Option trading is full of risks, and once the market develops in the opposite direction to the contract, it may bring huge losses to investors. In the actual operation, most contracts have been closed before the expiration (in this case, American options and European options must be executed on the contract expiration date).

options are mainly composed of the following factors: ① strike price (also called strike price). The buying and selling price of the subject matter specified in advance when the buyer of the option exercises his rights. 2 royalties. The option price paid by the buyer of the option, that is, the fee paid by the buyer to the option seller for obtaining the option. ③ Performance bond. The option seller must deposit the financial guarantee for performance in the exchange, ④ call option and put option. Call option refers to the right to buy a certain number of subject matter at the execution price within the validity period of the option contract; Put option refers to the right to sell the subject matter. When the option buyer expects the target price to exceed the strike price, he will buy a call option, and vice versa.

Each option contract includes four special items: the underlying asset, the exercise price of the option, the quantity and the exercise time limit.

underlying assets

every option contract has an underlying asset, which can be any of many financial products, such as common stocks, stock indexes, futures contracts, bonds, foreign exchange and so on. Usually, the option that the underlying asset is a stock is called a stock option, and so on. Therefore, options include stock options, stock index options, foreign exchange options, interest rate options, futures options, etc. They are usually listed on stock exchanges, options exchanges, futures exchanges, and of course, there are also over-the-counter transactions.

Strike Price or exercise price

the price used to buy and sell the underlying assets when exercising options. In most options traded, the underlying asset price is close to the exercise price of the option. The exercise price is clearly stipulated in the option contract, which is usually given by the exchange in the form of decreasing or increasing according to a certain standard, so the option with the same target has several different prices. Generally speaking, when an option is first traded, each option contract will give several different exercise prices at a certain interval, and then increase them according to the changes of the underlying assets. As for how many exercise prices each option has, it depends on the price fluctuation of the underlying assets. When investors buy and sell options, the general principle of choosing the exercise price is: choose the exercise price that is actively traded near the underlying asset price.

quantity

The option contract clearly stipulates that the contract holder has the right to buy or sell the quantity of the underlying assets. For example, the number of shares traded in a standard option contract is 1, but there are exceptions in some exchanges, such as the option contract traded on the Hong Kong Stock Exchange, where the number of underlying shares is equal to the number of shares traded in each lot.

exercise time limit (Expiration date or expiration date)

every option contract has an effective exercise time limit, and if it exceeds this time limit, the option contract will be invalid. Generally speaking, the exercise period of options ranges from one to three months, six months and nine months, and the effective period of an option contract for a single stock is about nine months. The maturity date of OTC options is tailored to the needs of buyers and sellers. However, in the options exchange, any stock should be classified into a specific effective period, which can be divided into the following types: ① January, April, July and October; ② February, May, August and November; ③ March, June, September and December. They are called January cycle, February cycle and March cycle respectively.

according to the different execution time, options can be mainly divided into two types, European options and American options. European option refers to the option that is only allowed to be exercised on the expiration date of the contract, and it is adopted in most OTC transactions. American option refers to an option that can be executed on any day within the validity period after the transaction, which is mostly adopted by the floor exchange.

For example:

(1) Call option: On January 1st, the subject matter was copper futures, and its option exercise price was $1,85/ton. A buys this right and pays $5; B sell this right and get 5 dollars. On February 1st, the price of copper futures rose to $1,95/ton, and the price of call options rose to $55. A can adopt two strategies:

exercising the right-A has the right to buy copper futures from B at the price of $1,85/ton; After A puts forward this requirement for exercising options, B must meet it. Even if B has no copper in his hand, he can only buy it in the futures market at the market price of $1,95/ton and sell it to A at the exercise price of $1,85/ton, while A can throw it out in the futures currency market at the market price of $1,95/ton, making a profit of $5/ton (1,95-1,85-5). B lost $5/ton (185-195+5).

put right-a can sell the call option at a price of $55, and a gains $5/ton (55-5).

if the copper price falls, that is, the market price of copper futures is lower than the finalized price of $1,85/ton, A will give up this right and only lose $5 in royalties, while B will make a net profit of $5.

(2) Put option: On January 1st, the strike price of copper futures is $1,75/ton. A buys this right and pays $5; B sell this right and get 5 dollars. On February 1st, the copper price dropped to $1,695/ton, and the price of put options rose to $55/ton. At this time, A can adopt two strategies:

When exercising the right, 111A can buy copper from the market at the middle price of 1695 USD/ton, and sell it to B at the price of 1 75 USD/ton, which B must accept, and A will gain 5 USD/ton (175-1695-5) and B will lose 5 USD/ton.

put right-a can sell put options for $55. A the profit is $5/ton (55-5).

If the copper futures price rises, A will give up this right and lose $5/ton, while B will gain $5/ton.

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 maximum loss is royalty), but his profit is infinite in theory. Second, as a seller of options (whether call option or put option), he has only obligations but no rights. In theory, his risks are infinite, but his income is obviously limited (the maximum income is royalty). Third, the buyer of the option does not need to pay a deposit, while the seller must pay a deposit as a financial guarantee for the obligation to be fulfilled.

option is an important hedging derivative tool to meet the needs of international financial institutions and enterprises to control risks and lock in costs. In 1997, the Nobel Prize in Economics was awarded to the inventor of the option pricing formula (Black-Scholes formula), which also shows that international economists attach importance to option research.

Special options

Path-related options

The final return of standard European options only depends on the original asset price on the maturity date. Path-dependent option is a special option whose final income is related to the change of the price of the original assets during the validity period of the option.

According to the dependence of its final income on the price path of primary assets, path-related options can be divided into two categories: one is that its final income is related to whether the price of primary assets reaches a certain or several agreed levels within the validity period, which is called weak path-related options; The final return of another kind of option depends on the information of the price of the original asset in the whole option validity period, which is called strong path-related option.

one of the most typical weak path-related options is the barrier option. Strictly speaking, American option is also a weak path-related option.

there are two kinds of strong path-related options: Asian option and lookback option. The return of Asian options on the maturity date depends on the average value of the prices experienced by the original assets during the whole option validity period, and it is divided into arithmetic average Asian options and geometric average Asian options because of the different meanings of the average value. The final income of the call-back option depends on the maximum (minimum) value of the original asset price within the validity period, and the holder can "look back" the whole price evolution process and select its maximum (minimum) value as the final price.

[ Edit this paragraph] Basic factors of option contract

The so-called option contract refers to a standardized contract in which the option buyer obtains the right to buy or sell a certain number of related commodity futures contracts at the pre-agreed finalized price within the specified period after paying a certain amount of royalties to the option seller. The elements of the option contract mainly include the following: buyer, seller, royalties, finalized price, notice and expiration date.

Option performance

Option performance has the following three situations

1. Both the buyer and the seller can perform the performance by hedging.

2. The buyer can also perform the contract by converting the option into a futures contract (obtaining a corresponding futures position at the finalized price level stipulated in the option contract).

3. Any option that is not used when it expires will automatically become invalid. If the option is imaginary, the option buyer will not exercise the option until the option expires. In this way, the option buyer loses the premium paid at most.

option premium

As mentioned before, option premium is the price of buying or selling an option contract. For the option buyer, in exchange for the option to give the buyer certain rights, he must pay a royalty to the option seller; For the seller of the option, he sells the option and undertakes the obligation to fulfill the option contract, for which he collects a royalty as a reward. As the royalty is borne by the buyer, it is the highest loss that the buyer needs to bear when the most unfavorable change occurs, so the royalty is also called "insurance money".

[ Edit this paragraph] Option trading principle

After buying a call option with a certain fixed price, you can enjoy the right to buy related futures after paying a small premium. Once the price really rises, the call option will be exercised to obtain the futures long position at a low price, and then the relevant futures contracts will be sold at a high price according to the rising price level to obtain the profit of the difference, and there will be profit after making up the paid royalties. If the price falls instead of rising, 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 through the analysis of the price changes in the relevant futures market, it is determined that the price of the relevant futures market is likely to rise greatly, so he buys the call option and pays a certain amount of royalties. Once the market price really rises sharply, he will get a bigger profit by buying futures at a low price, which is greater than the amount of royalties he paid for buying options, and finally make a profit. He can also sell the option contract at a higher premium price in the market, thus hedging profits. If the call option buyer is not accurate in judging the price change 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, the buyer fails to perform the contract, and the biggest loss is the amount of royalties paid.

[ Edit this paragraph] The relationship between option trading and futures trading

There are differences and connections between option trading and futures trading. The relationship is as follows: firstly, both of them are transactions characterized by buying and selling forward standardized contracts; Secondly, in the price relationship, the futures market price has an impact on the finalized price of the option trading contract and the determination of the premium. Generally speaking, the finalized price of option trading is based on the delivery price of forward trading of similar goods determined in futures contracts, and the difference between the two prices 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 will be. Therefore, the mature futures market and complete rules have created conditions for the emergence and development of options trading. The emergence and development of option trading provides hedgers and speculators with more optional tools for futures trading, thus expanding and enriching the trading content of futures market; sequence