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What is the function of options? What is the insurance function of options?
Option is a very abstract financial derivative product. People are familiar with auto insurance and life insurance, so some friends often interpret "insurance" as "option" as an introductory understanding of options. The following is a common view: if you buy a car and are worried about future damage, you buy auto insurance and get a claim later; If it is really damaged in the future, you can ask the insurance company for compensation. Options are "car insurance" here.

There is a little deeper understanding, saying: options are auto insurance in this case. For example, an investor holds ZTE stock in his hand and is worried about the loss of the stock price, so he buys a (put) option of the stock and obtains a right in the future; If the stock price really falls in the future, it will lead to the loss of stock value, but it can get some compensation (option income) from the option seller. Therefore, the option is the insurance here; Its target (ZTE stock) is equivalent to the target car of auto insurance; The option seller is equivalent to the insurance company, and the buyer is equivalent to the insured; The option buyer is like paying a certain premium to the insurance company in advance and getting a claim right in the future.

The above understanding of the two levels of "options" seems very convincing-options are insurance. And it is often said that "option is a very safe product because the buyer's risk is limited".

However, in order to truly and accurately understand the product "option", the above-mentioned "treating option as insurance" is inappropriate (for example, "insurance" cannot clearly correspond to many abstract attributes of option) or one-sided (for example, insurance only realizes one function of option), and sometimes even confuses some concepts related to option.

1. The trend expectation of the underlying assets is different.

From the above point of view, the insured will only buy insurance when he expects his car to be "damaged", which can be understood as that the insured is only "bearish" on his subject matter (car)-one-way expectation. As for the target of the option (ZTE stock), the option buyer can be bearish or bullish-double trend expectation. In this way, it seems that insurance only corresponds to put option, so call option and its series of properties will not be explained by insurance.

2. The way of exercise and the number of exercises are different.

If the car is damaged on the road one day, you can exercise it immediately-call the insurance company to report it. This is equivalent to the American option (which can be exercised at any time within the expiration time), but there are other ways to exercise the option, such as the European option can only be exercised at the expiration time, and the Bermuda option can be exercised for a limited number of times. Therefore, the relevant understanding of non-American options cannot be explained by insurance.

In addition, if the car is damaged again the next day, as long as the insurance has not expired, the insured can continue to exercise his right to get a second claim. However, options often have only one chance to exercise.

3. Different functions-insurance only realizes one function of options.

In view of the above, the reason for insurance is to hedge the risk of possible damage to the car, which is one of the three main functions of options-hedging risks. However, insurance cannot realize other functions of options.

4. Transaction level

We know that options can be used for trading and arbitrage, and there are many options trading strategies. And auto insurance seems to be non-tradable, with no market liquidity and single function (hedging risk). Of course, insurance also has the function of "speculation", so there is a saying of fraud.

5. Exercise standards are different.

Insurance and options are both "rights" issues, but the exercise standards are completely different. Insurance means that you can exercise your rights in case of car damage-you can claim insurance and get compensation, and it seems that you have not given up your rights (except those that are not within the scope of compensation). Options can be abandoned, such as ordinary European call options. If the target price is lower than the exercise price at maturity, the option holder will give up exercising this right.