1. Know what an option is?
Suppose you are a farmer and plant a big apple tree. You hope to sell Apple in the next few months, but you are worried that the market price may fall. To cope with this risk, you can use options.
Now, you have reached an option transaction with a buyer. You sold a call option to the buyer, giving the buyer the right to buy your apple at the price of 10 in the next three months. In exchange, the buyer pays you a fee as the price of the option contract.
In the next few months, several things may happen:
1. If the market price rises: If the market price rises to 15 USD, the buyer can choose to exercise the option and buy your apple at 10 USD. You need to fulfill your obligations according to the contract and sell the apple to the buyer at the price of 10. This is a good deal for you, because the actual value of your apple exceeds the exercise price.
2. If the market price drops: If the market price drops to $8, the buyer will not exercise the option. Because the market price is lower than the exercise price, buyers are reluctant to buy apples at a price higher than the market price. In this case, you can choose to sell your apple at a higher price in the market because you are not bound by the contract.
Through this story, you, as a farmer, gained the right to protect the risk of falling agricultural product prices by selling call options. Even if the market price falls, you won't suffer, because you have earned the option fee. Options provide you with a flexible risk management tool to protect your interests under uncertain market conditions.
Second, the three key concepts of options
1. exercise price: the exercise price is the price agreed in the option contract to buy or sell the underlying assets.
2. Maturity date: Maturity date is the last effective date of the option contract, and the holder must exercise the option before this date.
3. Option fee: Option fee refers to the fee or price paid when purchasing the option contract. This is the cost for the holder to get the option. When investors buy option contracts, they must pay a certain fee to the seller (or seller) of options. This fee is called royalty.
Third, the trading concept of option contract
The transaction of option contract refers to the process in which buyers and sellers buy and sell options for specific underlying assets.
1. Buyer: The buyer is a party to the option contract, and he pays royalties to obtain the right to the option.
2. Seller: The seller is a party to the option contract, and he collects royalties and undertakes corresponding obligations.
3. Opening: When the buyer or seller buys or sells the option contract for the first time in the market, it is called opening. This means that they have entered a new option trading.
4. Closing the position: the buyer or seller sells or buys the same option contract in the market to cancel the previous position is called closing the position. This means that they have ended the existing option trading.
5. Exercise: The right of the buyer to buy or sell the underlying assets at the agreed price on the expiration date according to the agreement in the option contract. This is called exercise. Exercise only applies to European options before the expiration date.
6. Maturity date: Maturity date is the last effective date of the option contract. Before the expiration date, the buyer can choose to exercise his rights, and the seller must abide by the obligations stipulated in the contract and expect the contract to be invalid.
Fourthly, the value classification of option contracts.
1. parity option: when the exercise price of the option is equal to the market price of the underlying asset, the option is called a parity option.
2. In-price: For a call option, if the market price of the underlying asset is higher than the exercise price, the option is called a real option. For a put option, if the market price of the underlying asset is lower than the strike price, the option is called a real option.
3. Out-of-price: For a call option, if the market price of the underlying asset is lower than the exercise price, the option is called a virtual option. For a put option, if the market price of the underlying asset is higher than the exercise price, the option is called a virtual option.
Investors can choose suitable contracts from different values, and contracts with different values have different leverage effects.
The verb (short for verb) option has the following advantages.
1. Leverage effect: Option trading can provide lower input costs and thus obtain greater capital gains. Because the option only needs to pay a premium instead of the full price of the underlying asset, investors can use leverage to expand the return on investment.
2. Risk limitation: When the buyer buys the option, he only needs to pay the royalty, so he can only lose the amount of the royalty at most. This limits the risk of investors and provides protection for capital.
3. Flexibility: Option trading has high flexibility. The buyer can choose whether to exercise the option, and the seller must abide by the contract. This enables investors to make decisions according to market trends and their own needs.
4. Protection strategy: Options can be used as a tool for portfolio protection. Buyers can buy put options to hedge the existing portfolio risks, so as to get some protection when the market falls.
5. Profit opportunities: Option trading provides profit opportunities. Buyers can get capital profits by correctly predicting market trends, while sellers can get income from royalties.
6. Diversification strategy: Option trading allows investors to adopt various strategies according to their investment objectives and market views. For example, the buyer can choose to buy a call option to benefit from the rising market, or buy a put option to benefit from the falling market.
Summary: Options are diversified financial derivatives, but there are also great risks, such as the risk of total loss of the buyer's royalties and the risk of loss of contract value. It is recommended to know more about the trading characteristics of options before investing, and then invest in trading.