Option contracts is a standardized contract. The so-called standardized contract means that all the contract terms are agreed in advance, with universality and unity, except that the price of the option is formed through open bidding in the market.
Option contract has three main elements: royalty, exercise price and contract expiration date.
1, royalties
Option fee, also called option fee and option fee, is the price of option. Option fee is the only variable in the option contract, which is formed by the open bidding of buyers and sellers in the international option market. It is the fee that the buyer of the option must pay to the seller in order to obtain the rights conferred by the option contract. For the buyer of the option, the premium is the biggest loss. For option buyers, selling options can earn royalty income without immediate delivery.
2. Execution price
The exercise price refers to the pre-specified buying and selling price when the buyer of the option exercises his rights. After the exercise price is determined, within the time limit stipulated by option contracts, no matter how the price fluctuates, as long as the buyer of the option requests the exercise, the seller of the option must perform its obligations at this price. For example, when an option buyer buys a call option, the price rises and is higher than the strike price within the validity period of the option contract, and the option buyer has the right to buy a specific commodity at a lower strike price. The option seller must unconditionally perform the selling obligation at a lower exercise price.
For foreign exchange options, the exercise price is the exchange rate specified in advance by the buyer of foreign exchange options when exercising.
3. Expiry date of the contract
The expiration date of the contract refers to the latest date that option contracts must perform. European options stipulate that Japanese can only exercise options when the contract expires. American options stipulate that options can be exercised on any trading day (including the contract expiration date) before the contract expiration date. The validity period of the same kind of option contract is different, which is divided into different time periods such as week, quarter, year and continuous month.
4. The price difference between foreign exchange options and foreign exchange firm trading.
For foreign exchange firm offer, there is only one price for a certain variety at a time; However, for foreign exchange options, at a certain point in time, because the face value, exercise price and expiration date of the options are different, there are often many option prices.
Trading means
Options are divided into call options and put options. Option traders can buy options or sell options, so there are four basic strategies for option trading: buy call options, sell call options, buy put options and sell put options.
1, buy a call option
If a trader buys a call option and the market price really rises above the strike price, the trader can exercise the option and make a profit. Theoretically, the price can go up indefinitely, so the profit of buying call options is theoretically unlimited. If it does not rise above the exercise price at maturity, the trader can give up the option, and the biggest loss is the option fee.
2. Buy put options
If a trader buys a put option, and then the market price really falls below the strike price, the trader can exercise the option and make a profit. Because the price can't fall to a negative value, the biggest profit of buying put options is the difference between the exercise price and the option fee. If the maturity rises above the strike price, the trader can give up the option, and the biggest loss is the option fee.
3. Sell call options
If the trader sells the call option and fails to rise above the strike price before the expiration date, the buyer of the call option will give up the option and the seller of the call option will get the income of the option fee. On the contrary, the buyer of the call option will demand to exercise the option, and the seller of the option will lose the market price minus the difference between the exercise price and the option fee.
It should be noted that as an option seller, the biggest profit is the option fee; The value of profit range is negative.
4. Sell put options
If the trader sells the put option and fails to fall below the strike price before the expiration date, the buyer of the put option will give up the option and the seller of the put option will get the income of the option fee. On the contrary, the buyer of the put option will demand to exercise the option, and the seller of the option will lose the difference between the exercise price minus the market price and the option fee.
It should be noted that as an option seller, the biggest profit is the option fee; The value of profit range is negative.