Option trading has become a very popular trading method in modern western financial markets. Since 1995, the development of domestic option market has gone through 13 years, but the relevant system is still not perfect. In order to avoid the risk of price fluctuation caused by high prices, domestic hedging enterprises began to participate in overseas option trading. With the outbreak of the current financial crisis, there are endless cases of hedging failure of domestic enterprises.
As a kind of contract, Financial option gives its buyers the right to buy or sell a certain amount of certain financial assets (called basic financial assets) at the price agreed by both parties within a specific period, which can help enterprises reduce risks and lock in profits. This hedging tool is being used by more and more enterprises. However, options are also speculative, and once misjudged, it will bring immeasurable risks to enterprises.
According to different types, options can basically be divided into the following categories:
According to the rights of option buyers, options can be divided into call options and put options. Any contract that gives the option buyer the right to purchase the underlying assets is a call option; A contract that gives the option buyer the right to sell the underlying assets is a put option.
Options can be divided into European options and American options according to the time limit for option buyers to exercise options. The buyer of European option can only exercise the option on the expiration date (that is, exercise the right to buy or sell the underlying assets). American option allows the buyer to exercise the option at any time before the option expires.
According to the division of the basic assets of option contracts, financial options can be divided into interest rate options, foreign exchange options, stock index options, stock options and financial futures options.
Main factors of option trading
1. Buyer: refers to the party who purchases the option or the party who purchases the right.
2. Seller: refers to the party selling the right.
3. Option fee: refers to the fee paid by the buyer to the seller in order to obtain the purchase right, also known as insurance premium. The option fee is of great significance: first, the maximum loss that the option buyer may suffer is controlled within the option fee, and second, the option seller can get an option fee income immediately when selling an option. The loss of the buyer or the profit of the seller shall be subject to the option fee and shall not exceed the option fee.
4. Transaction price: refers to the transaction price of forward commodities agreed by the buyer and the seller, also called contract price.
5. Notice date: It means that when the option buyer requests the delivery or delivery of the commodity contract, it must notify the seller on the scheduled delivery date or one day before the delivery date, that is, the notice date or the declaration date.
6. Maturity date: refers to the pre-determined delivery date or delivery date, that is, the end of the validity period of the option contract. This day is also called "Performance Day".
For the buyer of the option, the option contract only gives him the right, but not the obligation. He can exercise the right to buy or sell the underlying assets at any time within the specified period (American option) or maturity date (European option), or he can not exercise this right. For the seller of options, he only has the obligation to perform the contract and has no right. When the option buyer exercises his right to buy or sell the underlying assets according to the contract, the option seller must sell or buy the underlying assets accordingly according to the contract. In return for the obligations of the option seller, the option buyer has to pay a certain fee to the option seller, which is called option fee or option price. The option fee varies with the type, duration and volatility of the underlying asset price.
Characteristics of option trading
The rights granted to the buyer by the option contract are unilateral. When the price changes in its own direction, it can exercise options and the profit is unlimited; When the price change is unfavorable to it, you can give up exercising the option, and the loss is limited, which is limited to the option fee. At the same time, the loss of the seller of the option contract is infinite, and the gain is limited to the option fee. Moreover, option contracts is only mandatory for the seller, that is, as long as the buyer wants to exercise the option right within the contract period, the seller should fulfill his obligations.
The premium of options is determined according to market conditions and paid by the buyer to the seller. The biggest loss of the buyer is the initial premium, and there is no additional obligation.
Options have two practical functions: hedging and speculation. By buying and selling call options or selling put options, investors can not only achieve the purpose of preserving the value of commodities or futures contracts, but also gain profit opportunities brought about by price fluctuations of commodities or futures contracts. When using options to hedge, we just transfer the unfavorable risks and keep the favorable risks for ourselves. At the same time, options can also be used as a speculative means to seek higher returns for investors.