01｜What is an option?

An option is an agreement between two parties regarding future purchase and sale rights. The buyer has the right to buy at a specific price (exercise price) at a specific time in the future. Buy or sell a certain amount of a specific asset (the subject matter of the option contract).

02｜What are the rights of option buyers?

In options trading, the party who purchases the option is called the buyer. The buyer is the holder of the right. By paying a certain fee to the seller of the option, the buyer obtains the right and has the right to buy or sell an agreed quantity of the underlying asset at an agreed price at an agreed time. If the agreed price is unfavorable to you, you can give up your right to buy or sell under the options contract. Since the buyer has the right to choose, options are also called options.

03｜What are the obligations of the option seller?

When the option buyer applies for exercise, the option seller has the obligation to perform the contract. The option seller shall buy or sell a certain amount of the underlying asset at the exercise price specified in the contract.

At the same time, the option seller needs to pay a deposit as a guarantee that he can fulfill his obligations when the option expires.

04｜What role do options play in financial markets?

In 1973, the Chicago Board Options Exchange (CBOE) was established and listed the first batch of 16 stock options. In response to market-related concerns and to comprehensively evaluate the economic significance of stock options, Nansen completed the famous "Nansen Report" for CBOE at the end of 1974. Through a comprehensive study of the U.S. exchange-traded options system, the report concluded that options will not divert funds from the underlying market, help improve the liquidity of the underlying market, and stabilize the volatility of the underlying assets. At the same time, options can also help attract long-term funding.

05｜How can investors use options?

Due to their own characteristics, options can be used by investors to insure underlying assets, leverage investments, three-dimensional transactions and precision investments, and play a positive role in the formation of real capital.

06｜What does the three-dimensional trading of options mean?

In the stock market, investors can only make money when the stock price rises. When the stock price falls, they can only take short positions and cannot make profits, so it is a one-dimensional trading market.

In the futures market, you can make money by holding long futures positions when the market rises, and you can also make money by holding short futures positions when the market falls. It is a two-dimensional trading market.

In the options market, in addition to making profits in the two dimensions of rising and falling similar to futures, you can also make profits when the market is flat, consolidating slightly, or when you know it will change significantly but the direction is unclear. In the past, it was difficult for investors to construct an investment strategy when there was a slight consolidation. However, by using options, if it is expected that the market will consolidate slightly in the future, strategies such as selling a straddle can be constructed to obtain profits. Therefore, option trading is a three-dimensional transaction.

07｜What does precision investment in options mean?

In the era when there were no options investment tools, even if two investors had different levels of judgment on market trends, the income from both trading futures was generally the same, which was the spread between the buying and selling futures prices. But after the introduction of options, it is different. For example, investor A believes that the market outlook will rise, and investor B believes that the market outlook will rise within 10 days, and the increase is between 5% and 10%. Assume that the final underlying price increases by 6% and the futures margin rate is 10%. Investor A is only bullish and has no view on time or increase. He usually only buys futures, and the return is 60%. Investor B predicts an increase of more than 5%, so he can buy slightly out-of-the-money options and believes that the increase will not exceed 10%. Buying shallow out-of-the-money options with an exercise price of about 5% to reduce the premium paid, while selling options with an exercise price beyond 10% to further reduce costs, the income can reach more than 200%.

That is, when using options, the more accurate and thorough the view of the market, the higher the returns in the market. These reflect the role of using options to make precise investments and increase returns.

08｜What is the difference between using options to avoid risks and using futures?

1. The price of options is related to the volatility of the underlying, and can be used to manage volatility risks. Futures do not have this function.

2. When using futures risk management to avoid the risk of adverse price changes, you also give up potential gains. Options can retain the possibility of obtaining potential gains while locking in the highest loss.

09｜Why buy options?

If investors have a judgment on the direction of the market, but are worried that the actual trend will be different from expected, and are unwilling to take too much risk, they can buy options. The maximum loss for an option buyer is the premium paid, that is, the maximum loss is 100%; but relatively speaking, the maximum loss for futures is much larger.

Earning large profits with small profits is another major motivation for option buyers. Usually, the 10-fold or 100-fold increase in a single day seen in the news refers to the purchase of deep out-of-the-money options, although in a short period of time It is rare to see a 100-fold inversion, but options can indeed leverage small funds to generate big profits.

However, you should also be careful when buying options, and be careful about buying option contracts that are close to expiration or are deeply out-of-the-money.

10｜Why sell options?

The seller of options is the opposite of the buyer, with limited returns and greater risks. Why are there still people willing to be sellers?

1. The view of the market is opposite to that of the buyer. For example, the call option buyer believes that the market outlook will rise sharply, while the option seller believes that the market outlook will not rise.

2. Develop combination strategies to reduce costs and enhance profits. For example, if a customer buys one lot of copper futures at 50,000 yuan/ton, he can also sell an out-of-the-money call option with an exercise price of 53,000 yuan/ton. If the market price exceeds 53,000 yuan/ton, then the contract performance is equivalent to 53,000 yuan/ton. If you close the position, you will get a profit of 3,000 yuan/ton, and you can also get additional income from the royalty; if it does not exceed 53,000 yuan/ton, you will get the royalty income, which is equivalent to buying futures at a price lower than 50,000 yuan/ton.

3. Probability analysis. For example, a product has a 99.99% probability of earning 10,000 yuan and a 0.01% probability of losing 1 million yuan. Although the loss is large, many investors will still choose to buy this product because the probability of making money is extremely high. The same is true for option sellers. If they judge from historical data that the probability of option exercise is very small, they will sell the option.

At the same time, option sellers generally use futures to hedge risks and avoid huge losses under special market conditions.