Mastering options is also necessary for value investors. In some cases, options are used in conjunction with underlying stocks, which can increase transaction error tolerance or provide trading opportunities that are far more profitable than buying and selling underlying stocks.
Written by Hu Ning, a special author of this publication
A-share index options have been launched in recent years, which is still a very small trading variety, but it is very common and practical in mature markets. Trading type.
Many people tend to demonize options. A search will bring up a large number of results similar to "gambling", "liquidation", and "zero-sum game". Another group of people deified options, thinking that they could use small amounts to win big, and if they gave it a try, their bicycles would turn into motorcycles.
Both of these statements are biased. Options are both weapons and tools. How can a person wander in the world without carrying a knife, and options are that knife.
What are options? Simply put, it is a contract based on future prices, divided into two types of contracts: call options (Call) and put options (Put). Brokerages will open many contracts based on the liquidity of a stock or index. Actively traded ones are delivered on a weekly basis, and inactive ones are delivered on a monthly basis. The delivery time of a single-week contract is the close of every Friday, and the delivery time of a monthly contract is usually on After-hours on the third Friday of every month.
Understanding options
To give an easy-to-understand example, in "That Year the Flowers Bloomed and the Moon Was Full", sister Sun Li was optimistic about the price of cotton and wanted to buy cotton, but she didn't have the money to take advantage of it. For money, I first paid a deposit to the old farmer and agreed to buy his cotton at the agreed price and quantity in the fall.
This is a call option (Call). Sister Sun Li is a bullish caller. When the cotton price expires, the price is lower than the agreed price. She can choose not to receive the cotton, but the deposit will not be refunded.
On the contrary, if Sister Sun Li is bearish on the future price of cotton, she can find a businessman, pay some deposit, and sell a batch of cotton at the agreed time and price at the agreed time. The businessman thought, I plan to buy cotton in the fall anyway, so it would be good to receive a deposit in advance to reduce costs. Even though a fly is small, it is still a piece of meat, so it’s a deal!
This is a put option (Put). Sister Sun Li is short-selling Put. The risk is that the cotton price will be higher than agreed upon at maturity. She can choose not to supply the goods to the merchant, and the deposit will be confiscated by the merchant. The merchant is long-term selling Put, and he bears two risks. One is that the cotton price falls below the agreed price when it expires, and the merchant will have to eat Sister Sun Li's cotton at the originally agreed transaction price even if he is in tears; At the time of delivery, the merchant is tight and does not have enough money to receive the goods, so he has to find ways to raise money to receive the goods, or he may not want the goods and directly make up the difference in price and lose money. The second risk is selling naked Put. In fact, if the merchant prepares the money in advance, it becomes selling Covered Put, so this risk is not a real risk.
Options look very similar to futures, but in fact there is an essential difference between the two, that is, the person who buys the option contract has the right to exercise or not.
In addition, European options must wait until the exercise date before delivery, while American option buyers can exercise the option at any time, so American options are obviously more beneficial to the buyer of the contract.
Factors affecting option prices
There are three components of option prices.
First, the value of time. The further away from the present, the higher the value of time, because longer time means the greater the possibility of risks and opportunities. The second is volatility value, whose scientific name is Implied Volatility IV. If the Beta value of an underlying is higher, the value of this part will be higher. If it is a dividend-earning stock that does not move for ten thousand years, naturally the value will be lower. The third is the relationship with the current underlying price. For example, the current price of a stock is 10 yuan, and a call option with an exercise price of 11 yuan contains an out-of-value of 1 yuan. Then the actual value of this call option is minus 1 yuan, and the price is completely It consists of time plus fluctuating value. If it is a call option of 9 yuan, then the contract has an actual value of 1 yuan, plus the time value and volatility value, the price will naturally be higher.
In addition, if the underlying stock pays dividends and ex-rights during the option contract period, it will be converted into the option price. Sometimes when you see an option that is much more expensive than a nearby contract, it is probably not because you have found an opportunity to pick up the option, but because there will be financial reports or dividends and ex-rights during the period.
Risk and Profit
In summary, it can be seen that selling options can receive a deposit, but it bears high price risks.
There is a saying that the option buyer has unlimited benefits and limited risks; the seller has limited benefits and unlimited risks. This sentence is actually very misleading. Generally speaking, selling naked call options is riskier than selling put options.
The reason is that unless a huge thunder is stepped on, the stock price is unlikely to fall to zero within the agreed time. Even if it falls to zero, the maximum loss can be estimated. However, within the agreed time, the room for the stock price to rise is much greater. For example, if there is a gust of wind in the blockchain, and the underlying stock price increases tenfold in a month, it will be enough to sell the call and liquidate the position. After all, the design mechanism of the stock market is inherently biased towards the long side!
Buying options requires a deposit, and the risk you bear is at most losing the deposit. You can win with a small amount.
But any good investment can turn into poison if you add a time limit. Time will corrode your deposit, and the closer it is to the expiration time, the more severe the corrosion will be. In this way, investment becomes a game of betting on the odds of winning against time. The probability of losing money in the long run is actually quite high.
Due to the various components of option prices, many fancy ways of playing are derived. However, in martial arts novels, the more complicated the moves, the more mediocre the martial arts are. Most of them involve fancy fists and embroidered legs, such as "Luoying Shenjian Zhang", "Splashed Ink and Threaded Ma Swordsmanship" and so on. The same is true for options trading, the more fancy it is, the less useful it is. Because the more paired transactions in an option portfolio, the higher the winning rate, but the higher the transaction cost.
In general, mastering options is also necessary for value investors. The road to price investing does not mean that people have to fight with bare hands. In some cases, options are used in conjunction with underlying stocks, which can increase the fault tolerance rate of transactions. , or provide trading opportunities that are far more profitable than buying and selling the underlying stocks. The premise is that in actual use, you cannot make too outrageous judgments on the trend of the underlying stock.
Various routines for actual operations
There are many special trading terms for options. In order to facilitate my memory and make it more interesting, I have summarized some personal options trading methods, divided into There are two routines, long and short, and they are named after tricks in martial arts novels.
Conservative long position: Dragon fighting in the wild - its blood is black and yellow
This strategy is a relatively conservative bottom-buying action. When the stock price has fallen sharply for a period and stabilized in stages, start to consider doing it. A lot, but the position is already relatively heavy, and I am not sure whether the current market environment is safe, and I don’t know whether the underestimation will last for a long time. Therefore, I start selling Put with a small position to try to attract goods. If the option is exercised, I resell Call and sell at the same time. Lower priced Put. This is an enhanced version of grid trading. If the grid price is never triggered, you can continue to eat away at the time value and volatility value during the waiting period. At the same time, you can buy the spare position funds into treasury bonds or other high-grade bonds, which can significantly increase the price. Efficiency in the use of funds.
In the second half of 2018, Chinese concept stocks were in chaos. This strategy helped me reduce a lot of losses. For example, the subject of Vipshop (VIPS).
In early September 2018, when Vipshop fell below $7 and the PE was close to 10 times, I felt that this might be an acceptable undervaluation, so I tried to sell 30 lots (3,000 shares) Put the exercise price of US$6.5 in that month, and charge a premium of US$150. After the contract expired successfully, because I judged that the market sentiment would be even lower, I lowered the exercise price to US$6, and halved the number of transactions to 15 lots (1,500 shares). , continue to sell Put for the current month.
When I sold the Put that expired in October and had an exercise price of $6 for the third time, the stock price of Vipshop fell to about $4.5, and these 1,500 Put shares were exercised and bought. underlying stock. Then I immediately sold 15 covered calls expiring in November with an exercise price of US$6 and another 15 puts with an exercise price of US$4.5, collecting premiums of US$222 and US$150 respectively.
Vipshop’s stock price fluctuated significantly after that, but it never rose below $6 or fell below $4.5 until the end of the exercise day, so both my Call and Put expired. It's the same situation in December. Until January 2019, Vipshop's stock price exceeded 6 US dollars in one fell swoop, and my 1,500 shares were triggered to sell and clear my position.
The actual investment amount was US$9,000, and after holding it for three months, the profit (basically all the royalties) was US$1,524, a gain of 17%. The important thing is that when I passively exercise the option to buy the underlying stock, the purchase cost after deducting the premium is approximately US$5.5. When Vipshop's stock price fell to the $4.5 level emotionally, my maximum floating loss was 20%, which was much better than the $6.5 purchase price set during the initial observation, and because this was the first position I bought. , you can still stand on the side of time and continue to eat royalties later, so you won't panic, let alone want to liquidate your position.
However, this method also has two flaws: first, if the fundamentals of the target are fundamentally damaged, such as financial fraud and unresolved debt problems, it can only reduce the amount of your losses but cannot guarantee profits; second, , if the sell Put is exercised, buy the underlying stock position, and then immediately resell the covered call, you may miss the subsequent violent rebound and excess profits of the individual stock. For example, after the 1,500 shares of Vipshop held in January 2019 were exercised and sold, the company had to watch the huge profits from US$6 to over US$8 in the first half of the year.
The remedy I can think of is, first of all, don’t use this method to intervene in bad cigarette butts that are very cheap but have debt risks; secondly, if you passively exercise the option to buy the underlying stock, the underlying stock will The technical situation is very oversold. You don't need to sell the covered call immediately. You can hold it and wait until it rebounds before deciding whether to sell the underlying stock directly to make a profit or continue to sell the covered call to collect the premium.
(To be continued)