If you really want to understand call and put options, you must have a good understanding of buyers and sellers.
How do buyers and sellers of options explain?
The option buyer is the holder of the right, and obtains the right by paying a certain fee (option fee or royalty) to the seller of the option, and has the right to buy or sell the agreed amount of underlying securities from the seller at the agreed time and price, so the buyer is also called the right party.
The seller of the option has no right and assumes obligations. Once the buyer exercises his power, the seller must sell or buy the agreed number of underlying securities at the agreed time and price, so the seller is also called the debtor.
Generally speaking, buyers and sellers are like buying insurance.
One is the buyer (obligee) of insurance, and the other is the seller (obligor) of insurance, but this seller can be an institution or an individual.
The buyer pays the insurance premium and gains the right.
The seller who receives the fixed premium income assumes the obligation.
Its obligations include:
(1) Obligation to accept the exercise: If the option buyer exercises (exercises), the seller is obliged to sell or buy the underlying assets at the agreed price. If the buyer exercises his rights, the opening party who subscribes for the option has the obligation to sell the underlying assets at the price agreed in the contract; The opening party of the put option has the obligation to buy the underlying assets at the price agreed in the contract.
(2) Obligation to pay the deposit: When the option is exercised, the seller undertakes the obligation to buy or sell the underlying assets, so it must pay the deposit every day according to certain rules as the capital guarantee for its performance of option contracts.
How to make profits and losses?
The buyer (the right party) can close the position at any time to make a profit and earn the difference, whether it is a buy subscription or a buy put, as long as the premium of your opening position is higher than your cost. On the other hand, if the premium depreciates, you will lose money until the exercise date gradually returns to zero.
No matter whether the seller (debtor) sells subscription or put, as long as the royalty has not risen and has been depreciating, the difference in the middle is your profit, and you can also close your position at any time to earn the difference. On the other hand, if the premium goes up, you will lose money, and you will have to add a deposit. Stop loss and close the position if you don't want to add margin.
We can understand it this way: as the buyer's right party, we only need to pay the patent fee; As the seller's obligor, you need to pay a deposit. The buyer can be big or small, and lose royalties at most; The seller collects royalties, but needs to pay a deposit.
For call options, the option buyer sees a big rise, and the seller sees a decline; For put options, the buyer watched the plunge, while the seller watched the plunge. It should be noted that being bearish does not mean being bearish. Bearishness may be a slight decline, a sharp decline, or a sideways shock. These are all called bearish, so the range of bearish is larger than that of bearish. In the same way, so do people who can't stand it.
Option buyer characteristics
1, which can be small funds.
2. High profits.
3. The risk is controllable
From the buyer's point of view. Its most notable feature is that the maximum loss is limited and the profit space is theoretically infinite. When we buy option contracts, the biggest loss is our royalties.
The usual liquidation methods of call options are: 1, held at maturity and exercised. In this process, a relatively large amount of capital is generally needed, and most investors will not choose this method. 2. Give up the right to exercise when the holding period expires. This is generally for hypothetical options, because when the expiration date comes, hypothetical options will become worthless, so I simply don't want them and give up this part of the contract. 3. Hedging positions and selling call options before maturity is also a common method used by most investors.
Who will buy options? 1, investors who are strongly optimistic about the (empty) market think that it will rise or fall in the future; 2. Short-term speculators, who don't necessarily look at long-term ups and downs, only care about short-term trends; 3. Day traders; 4. Investors with strategic position. But pay attention to the relationship between probability and odds. For example, because of the time value, the buyer of the virtual option has a small probability of exercising when it expires. Similarly, his chances of winning are often very great, and some will be ten times or twenty times.
Option seller characteristics
1, high input and low income
2. Margin system
3. Characteristics of risks and benefits
From the perspective of the option seller, first of all, the maximum profit is limited, and theoretically the maximum loss is infinite. The biggest profit is the premium we get when we sell options, that is, when the current price becomes zero.
The position of the option seller can be closed in the following ways: 1, expiration of holding, exercise and performance. When the buyer applies for exercising, the seller has the obligation to perform. For the seller who subscribes for the option, when the buyer puts forward the exercise, the seller must sell the spot in his hand to the other party at the exercise price; For the seller of put options, when the buyer puts forward the exercise, the seller must buy the spot in the buyer's hand at the exercise price. 2. Most investors will choose to hedge their positions before maturity to obtain the price difference during the holding period.
Who will sell the option? Where is it? 1, people who hold opposite opinions; 2. For example, people who use comprehensive strategies may not sell naked, hold the buyer's selling imaginary value, or hold the spot as a seller; 3. Market maker, we have a market-making system for option trading. They provide liquidity for a part of this market; 4. The liquidator mainly refers to the liquidation operation carried out by the option buyer; 5. Hedgers; 6. The person who locks the warehouse. As a seller of options, the probability of winning is relatively large and the odds are relatively small.
Contact between option buyer and seller
1, rivals.
Step 2 be friends with each other
3. Buyers and sellers can change.
Option is a zero-sum game of a single contract. If someone buys an option, someone must sell it. Buyers and sellers love each other and kill each other At every stage, there are people with different ideas. Maybe this moment is the buyer and the next moment is the seller. Can be converted at any time and exist with each other.
Combination of option buyer and seller
1, the formation of price difference strategy
For example, buying a real option with a low exercise price and selling a hypothetical option with a high exercise price is considered as a moderately bullish next. Its profit curve is shown in the figure. Limited losses and limited profits.
2. Forming a synthetic position
Buy call options and sell put options, thus forming a combination that is strongly optimistic about the market outlook.
3. Advantages of combining buying and selling
First of all, we can accommodate more funds. Generally speaking, as a seller, the funds we need are more than 10 times that of the buyer. Losing money is not that easy.
4. Sell before you buy
Because the seller has a higher probability of winning, it is generally less likely to exercise options in virtual value. In the first half of the month, you can make a certain profit as a virtual seller, and in the second half of the month, you can take this profit as a buyer and get excess income.