In the 18th and 19th centuries, Europe and the United States successively appeared relatively organized option transactions, but the subject matter of the transactions was still mainly agricultural products. In the early 2th century, the transaction of options was regarded as a highly gambling transaction. It was not until 1934 that the Securities and Exchange Commission (SEC) put options trading into management after the implementation of the securities law. At the same time, some brokers also organize an association (put and call brokers and dealers association). Under the operation of this association, option trading has a quotation and trading network Over The Counter.
Since 1973, the option market has been growing at a fairly fast speed; Not only the futures exchanges have launched options trading of various trading objects, but also countries have established options trading markets.
in the late 197s, the theory of foreign exchange option was gradually developed. The reason why the theory of foreign exchange option developed late is that the interest rate problem between two currencies was not solved until the end of 197s. As far as all financial commodity options are concerned, the "parameter" composition of foreign exchange options is the most complicated. The "parameters" of most options do not include interest rates and dividends, while stock options only include dividends; However, the parameters of foreign exchange option include the interest rates of two currencies, and its complexity is not difficult to imagine.
as far as the market of foreign exchange options is concerned, options can be divided into two types: the first type is the foreign exchange futures options market of futures exchanges, and the options traded in it are based on Currency Futures traded in futures exchanges. Its contract specifications, fluctuation range, trading and delivery methods, and the calculation and liquidation of the deposit are all stipulated by the Exchange. The trading of this foreign exchange futures option is limited to the futures exchange. The second type is spot foreign exchange option. The transaction of spot foreign exchange option is just like spot foreign exchange transaction. The buyer and seller decide the amount, period, price and other contract contents by themselves, as long as the buyer and seller agree to the transaction contents. Generally speaking, the trading of spot foreign exchange options is negotiated by both parties without any intermediary, so it is Over The Counter? OTC) called it.
Option, as its name implies, is the right of a holder to choose whether to perform the contract or not. People who buy options look at whether the right they buy can generate income through Exercise when it expires or before it expires. Let's use a simple example to illustrate the meaning of this sentence.
Suppose there is a certain company today. After careful analysis, it is determined that the real estate price in a certain section of Guangzhou will have room for substantial increase in the next three years. No matter whether the purpose of a certain company is to buy property or invest in wealth management, he decides to seize this profitable opportunity. Therefore, A can sign a pre-sale housing contract with the developer of the lot, and after paying the signing fee, deposit and project payment, he can buy the house at the pre-determined price after the future housing is completed according to the pre-sale contract. This pre-sale contract is actually a very simple option contract.
in this pre-sale contract, the buyer and the seller pre-determine the amount of money (performance price) that Party A should pay when delivering the house at a certain point in the future (due date or settlement date) when signing the contract. The subject matter of the contract is the property of a certain floor or unit designated by Party A.. The deposit, contract payment, project payment and other expenses paid by a certain company are equal to the royalty paid by a certain company to buy this option. (Note: Terms such as maturity date, performance price, subject matter and royalty are all important terms in the option. )
The biggest advantage of the option is that the party who buys the option has the right to perform or not after paying the royalty, but it is not obligated to perform or not. Just like in the example described above, a certain person bought the right to buy the house he designated at a specific price in the future. If the real estate price in the area really rises before the house is completed and delivered, a certain person will naturally be willing to fulfill the contract and buy the house at the originally agreed lower price. However, if, unfortunately, the real estate price in this lot falls before the house is completed, A can choose to give up the right to buy this house, and the builder can't ask A to fulfill the contract. This is because what A buys is a "right", not an "obligation". Of course, if A decides not to perform the contract, the original royalties (deposit, contract payment, project payment, etc.) must be given up at the same time. Therefore, in the decision-making process of whether to sign the pre-sale housing contract or whether to perform or not to perform when the project is completed, A will certainly take the royalty fee into account. After going through such a process, a certain person gains an opportunity with unlimited profit space (rising house prices) with limited risk (loss of royalties).
So, in a business activity that can often be seen in daily life, we can easily find the figure of choice. In the future, we will lead you into the world of choice with more examples. Then understand how to operate options in foreign exchange and other financial markets and gain more profit opportunities.
Being small and broad is its characteristic
In the last article, we used the pre-sale contract between the house buyer and the construction developer as an example to explain how to look at the opportunities brought by the option from the perspective of investors.
In that example, A who signed the contract obtained the right to buy the designated house at a predetermined price in the future after paying a royalty, while the builder had to sell the house to A at a predetermined price in the future when A decided to perform the contract. A certain armor? The option (buyer) has the right; And the builder's option (seller) is an obligation. Although the details and trading rules of option trading are still quite different from this example, it has explained the investment nature of option.
then, what are the investment properties of options and the advantages of these properties? Simply put, using options as an investment tool provides the following benefits.
first, the buyer of the option has rights, not obligations. The buyer of the option, with the expected psychological support for a specific market, pays a royalty and obtains the opportunity to have unlimited profit space when the market trend is favorable to him. And this opportunity can be combined with the view of seeing more market outlook (call right) or with the view of bearish market outlook (put right).
in contrast, the seller of the option, after receiving the royalty paid by the buyer, undertakes the obligation to perform the contract at the buyer's request in the future. At first glance, the buyer of the option can enjoy unlimited profit opportunities by paying a sum of money. The seller of the option, after receiving a royalty, must undertake unlimited obligations. Normal people will wonder who would want to be the seller of options. In fact, in a mature market, the number of buyers and sellers of options is equal, maintaining a fairly good market mechanism. As for the niche of the option seller, it is an advanced topic, and we will explain it in detail in the future.
second, the option to buy can enjoy a higher financial leverage (financing ratio). For example, if we want to buy a dollar call option/yen put option with a contract amount of $1 million today, the royalty we have to pay may be as low as hundreds or thousands of dollars, or as high as hundreds of thousands of dollars.
of course, the level of royalty depends on the terms of the option contract. But what we need to know now is that we can buy a large option contract with a fairly low royalty. It goes without saying that option trading is small and broad.
thirdly, options trading should be both long and short, which is suitable for all kinds of market conditions. Using the option operation, we can not only be long and short, but also make profits in the consolidation trend. Operators can even tailor various options operation strategies according to your own risk tolerance and risk preference. In the foreign exchange market, the option contract brings more operation modes and flexibility.
the above three points are only a small part of many features of option operation, and we will only mention the big point here. Some concepts and expressions in the content may not be familiar to your foreign exchange investment friends, but in this series, we will take you from the simple to the deep, from the most easy-to-understand stage, step by step, and become the winner of foreign exchange option trading, so stay tuned.
the hedging function is like the option of life insurance
. From the perspective of avoiding investment risks, it is like an insurance contract, which provides a mechanism for operators to avoid part losses.
when investors expect the market uncertainty to increase, but they don't want to settle their positions, they can buy an option contract to protect the downside risk of their investment and at the same time maintain the future profit potential and space. This is actually an out-and-out twin brother with the insurance contract in real life.
For example, in real life, in addition to the purpose of saving, we will buy life insurance or accident insurance to ensure that we can get compensation for personal injuries caused by emergencies. Under normal circumstances, we buy life insurance and accident insurance, which does not mean that we expect these conditions to happen to us in the foreseeable future. In fact, no normal person wants to get a claim when buying insurance. After all, the prerequisite for getting a claim is that an accident has happened. Since the accident has happened, getting more claims is just to make up for the shortcomings. Therefore, what insurance wants to cover is "uncertain" accidents. Because if an accident is foreseeable, how can it be considered an accident? Knowing that the stock price will fall, selling shares will be over, and what kind of risk will you avoid! ?
In fact, we can see the similarities between option and insurance terminology. In English, the insurance Premium is "Premium", and the option premium is also "premium". In the early years, some translators translated royalties into "premium" of options, which was ironic and completely unable to express the essential similarities between royalties and insurance premiums. From the similarity of this term, we can also infer that the function of option in portfolio insurance is the same as that of life insurance and accident insurance to individuals.
conceptually, operators who want to hedge their portfolios must "buy" options? Whether it is a right to buy or a right to sell. This truth is the same as that the insured of life insurance "buys" the insurance contract, not "sells" the insurance contract. Hedgers buy an option? He who wants to hedge against long positions buys and puts, and he who wants to hedge against short positions buys and puts, so as to obtain the right to make up for the loss of the original investment position by the profit of option trading when the market situation is unfavorable to his portfolio. If the market has not changed to the detriment of its investment position, the risk-averse just paid a premium? The premium is just to buy an insurance (option).
More and more people will buy travel accident insurance when traveling abroad. I believe that when he returns home safely, he won't complain that he didn't get the claim because he didn't have an accident during the trip! Similarly, for investors who use the option, the option provides a barrier to avoid market risks, and the price paid is the royalty.
what is discussed in this article is only the concept that option is applied to hedging operations. The details of hedging operations can only be described carefully after a deeper understanding of the option.
whether to earn or lose
In the classification of options, we can think from several angles. First, it is classified by the directionality of the right to choose. Second, it is classified by the way of performance of the option. Third, classify by the value of the option. Fourth, it is classified by the complexity of the conditions of the right to choose. Starting from this article, we will give readers a detailed introduction on all aspects of the right to choose one by one.
every financial instrument has operational orientation. If the price of a certain commodity rises in the future, the operator can make a profit. If the price of a commodity falls in the future, the operator who empties it can make a profit. But the option does not judge its representative direction by buying or selling. In other words, if I only say that I bought an option, outsiders can't know how the price of the subject matter will rise or fall in the future, which will affect my profit or loss. However, if I specify whether what I bought is a call right or a put right, it is enough to express what the price of the subject matter represents to me.
options can be roughly divided into "CALL Option" and "Put Option". When Chinese people learn the right to choose, they are often between buying and selling the right to buy, and there are obstacles in learning because of the terminology. I suggest that you use the original text more when learning the right to choose, but it is less confusing. CALL, which means "call" and "request" in English, represents a right of claim and purchase in the future. And Put, in English, means "throw out" and "give up", which stands for the right to give up and sell in the future. Literally, the differences can be clearly distinguished.
the holder of the call right has the right to buy the Underlying object to the seller of the call right at a pre-agreed Strike Price on a specific date in the future. So buying a call right can lock in the price of a specific commodity in the future. If the price of the subject matter rises above the strike price before the expiration date, the holder of the call right has the right to buy the subject matter at the strike price and sell it at the market price to earn the price difference. If the price of the subject matter does not rise above the performance price as expected, the holder of the call right can choose not to perform, let the call right expire and lose the royalties paid at the beginning.
the holder of the put right has the right to sell the subject matter to the seller of the put right at a pre-agreed performance price on a specific date in the future. So buying a put right can lock in the price of a particular commodity in the future. If the price of the subject matter falls below the strike price before the expiration date, the holder of the put right has the right to sell the subject matter at the strike price and buy the subject matter at the market price to earn the price difference. If the price of the subject matter does not fall beyond the strike price as expected, the holder of the put right can choose not to perform, let the put right expire and lose the royalties paid at the beginning.
Therefore, we can see a simple principle from the basic nature of call right and put right. That is, when an investor is bullish on the market outlook, the operational strategy he should adopt is to buy (hold) a call right; When the subject matter rises above the strike price before the expiration date, he will make a profit. When an investor is bearish on the market outlook, the operational strategy he should adopt is to buy (hold) a put right; When the subject matter falls below the strike price before the expiration date, he will make a profit. This is the most basic operation strategy of option, and it also clearly distinguishes the difference between call option and sell option.
Make the currency matching clear
In the last article, we talked about