Options refer to the power that can be bought and sold in a certain period of time in the future. They are owned by the buyer after paying a certain amount of money (referring to the premium) to the seller within a certain period of time in the future (referring to American options) or at a certain time in the future. The right to buy or sell a certain amount of a specific subject matter to the seller at a predetermined price (referring to the strike price) on a specific date (referring to European options), but without the obligation to buy or sell.

Options trading is actually the trading of this right. The buyer has the right to execute or not to execute, and can choose flexibly. Options are divided into over-the-counter options and on-market options. OTC options transactions are generally concluded jointly by both parties to the transaction.

Option is a financial instrument based on futures. In essence, options are essentially pricing powers and obligations separately in the financial field, so that the transferee of power can exercise his power within a specified time whether to conduct a transaction, and the obligated party must perform it. When trading options, the party who purchases the option is called the buyer, and the party who sells the contract is called the seller; the buyer is the assignee of the power, and the seller is the person who must fulfill the obligation of the buyer to exercise the power. Specific pricing issues are discussed more comprehensively in financial engineering.

Options mainly have the following components: ①Exercise price (also called strike price). The purchase and sale price of the subject matter specified in advance when the buyer of the option exercises his right. ②Premium. The price paid by the buyer of the option. Price, that is, the fee paid by the buyer to the option seller. ③Performance deposit. The option seller must deposit the financial guarantee in the exchange for performance. ④Call options and put options refer to the period of validity of the option contract. The right to buy a certain amount of the underlying asset at the strike price; a put option refers to the right to sell the underlying asset. When the option buyer expects that the price of the underlying asset will exceed the strike price, he will buy a call option, and vice versa. Put options.

According to different execution times, options can be divided into two types: European options and American options. European options are options that are only allowed to be executed on the expiration date of the contract. It is used in most over-the-counter transactions. American options refer to options that can be executed at any time within the validity period after the transaction.

Example:

(1) Call option: On January 1, the underlying object is copper futures, and its option execution price is US$1,850/ton. A buys this right and pays US$5; B sells this right and earns US$5. . On February 1, the copper futures price rose to $1,905/ton, and the price of the call option rose to $55. A can adopt two strategies:

Exercise the right - A has the right to press $1,850. / ton price to buy copper futures from B; after B puts forward the request to exercise the option, B must satisfy it. Even if Japan does not have copper in hand, it can only buy it in the futures market at the market price of US$1,905 ton. The execution price is 1850 US dollars / ton and sold to A, and A can sell it on the futures currency market at a market price of 1905 US dollars / ton, making a profit of 50 US dollars (1905-1850-5), while B loses 50 US dollars (1850-1905). +5).

Selling the right - A can sell the call option at $55, and A makes a profit of $50 (55-5).

If the price of copper falls, that is. If the market price of copper futures is lower than the final price of US$1,850/ton, A will give up this right and only lose US$5 in premium, while B will make a net profit of US$5.

(2) Put option: January 1. , the execution price of copper futures is 1,750 US dollars/ton, A buys this right and pays 5 US dollars; B sells this right, and earns 5 US dollars. On February 1, the copper price fell to 1,695 US dollars/ton, and the price of the put option was 1,750 US dollars/ton. rises to US$55. At this time, A can adopt two strategies:

Exercise the right - A can buy copper from the market at the mid-price of US$1,695/ton, and buy copper at the mid-price of US$1,750/ton. The price of tons is sold to B, B must accept it, A makes a profit of 50 US dollars (1750-1695-5), and B loses 50 US dollars.

The right to sell - A can be sold at a price of 55 US dollars. Put option. A makes a profit of $50 (55-5).

If the price of copper futures rises, A will give up this right and lose $5, and B will gain a net gain of $5.

Through the above examples, the following conclusions can be drawn: First, as the buyer of an option (whether it is a call option or a put option), he only has rights but no obligations. His risk is limited (the maximum loss is the premium), but his profit is theoretically unlimited. Second, as the option seller (whether it is a call option or a put option), he has only obligations but no rights. In theory, his risk is unlimited, but his income is limited (the maximum income is the premium). Third, the buyer of the option does not need to pay a deposit, but the seller must pay a deposit as a financial guarantee to fulfill the obligation.

Options are an important hedging derivative instrument that emerged to meet the needs of international financial institutions and enterprises to control risks and lock in costs. The 1997 Nobel Prize in Economics was awarded to the option pricing formula ( The inventor of the Black-Scholes formula), this also shows that the international economics community attaches great importance to options research.

Basic factors of option contracts

The so-called option contract means that after the option buyer pays a certain amount of premium to the option seller, he will obtain the option in advance within a specified period. A standardized contract for the right to buy or sell a certain amount of related commodity futures contracts at an agreed final price. The main components of an options contract include the following: buyer, seller, premium, final price, notification and expiration date, etc.

Option performance

There are three situations for option performance

1. Both the buyer and seller can perform the contract through hedging.

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

3. Any options that are not used upon expiration will automatically become invalid. If the option is out-of-the-money, the option buyer will not exercise the option until the option expires. In this way, the option buyer will lose at most the premium paid.

Option premium

As mentioned before, option premium is the price at which an option contract is purchased or sold. For the option buyer, in exchange for the option giving the buyer certain rights, he must pay a premium to the option seller; for the option seller, he sells the option and assumes the obligation to perform the option contract, for which he Receive a royalty as compensation. Since the premium is borne by the buyer and is the maximum amount of loss that the buyer will bear in the event of the most adverse changes, the premium is also called "insurance".

Principles of option trading

Buying a call option with a certain final price, after paying a small premium, you can enjoy the right to buy related futures. Once the price really rises, the call option will be executed and a long futures position will be obtained at a low price. Then the relevant futures contract will be sold at a high price according to the rising price level to obtain a profit from the price difference. After making up for the premium paid, there will be profit. If the price does not rise but falls instead, the call option can be abandoned or transferred at a low price, with the maximum loss being the premium. The buyer of the call option buys the call option because, through analysis of the price changes in the relevant futures market, it is determined that the price of the relevant futures market is very likely to rise significantly. Therefore, he buys the call option and pays a certain amount. Royalty. Once the market price really rises significantly, then he will make a larger profit by buying futures at a low price, which is greater than the amount of premium he paid to buy the option. He will eventually make a profit. He can also buy the futures at a higher price in the market. Sell ??the option contract at the premium price and thereby make a profit from hedging. If the call option buyer makes an inaccurate judgment on the price trend of the relevant futures market, on the one hand, if the market price only rises slightly, the buyer can perform the contract or hedge and obtain a little profit to make up for the loss of the premium; on the other hand, if the market price If the price falls, the buyer will not perform the contract, and its maximum loss will be the amount of the premium paid.

The relationship between options trading and futures trading

There are differences and connections between options trading and futures trading. The connection is: first, both are transactions characterized by the purchase and sale of forward standardized contracts; second, in terms of price relationship, the futures market price has an impact on the final price of the options trading contract and the determination of the premium. Generally speaking, the finalized price of option trading is based on the forward delivery price of similar commodities determined by the futures contract, and the difference between the two prices is an important basis for determining the premium; thirdly, futures trading is an option transaction. The content of the basic transaction is generally the right to buy or sell a certain number of futures contracts. The more developed futures trading is, the more foundation there is for the development of options trading. Therefore, the maturity and complete rules of the futures market create conditions for the emergence and development of options trading. The emergence and development of options trading has provided hedgers and speculators with more optional tools for futures trading, thereby expanding and enriching the trading content of the futures market; fourth, futures trading can be long and short, and traders Physical delivery is not necessarily required. Options trading can also be long or short. The buyer does not have to actually exercise this right. As long as it is beneficial, the buyer can also transfer this right. The seller does not necessarily have to perform, but can relieve the option buyer from his liability by buying the same option before he exercises his rights. Fifth, since the subject matter of the option is a futures contract, the option is bought and sold when the option is fulfilled. Both parties will get corresponding futures positions.

Options trading venues:

Options trading venues do not require special venues. They can be traded in futures exchanges, specialized options exchanges, or securities exchanges. Options transactions related to equity traded. Currently, the world's largest options exchange is the Chicago Board Options Exchange (CBOE), the world's largest options exchange; the largest options exchange in Europe is the European Futures and Options Exchange (Eurex), formerly Deutsche Boerse. (DTB) and Swiss Options & Financial Futures Exchange (SOFFEX); in Asia, South Korea’s options market has developed rapidly and its trading scale is huge. It is currently the country with the best options development in the world. China Options trading is available in Hong Kong and Taiwan.

Domestically, several exchanges, including the Zhengzhou Commodity Exchange, have already conducted preliminary research on the listing of options in mainland China