As the crown jewel of financial derivatives, options have attracted more and more investors' attention, and its nonlinear profit and loss characteristics can help all kinds of market participants realize specific risk-return structure. High-net-worth customers can use options to obtain excess risk returns, industrial customers can use options to hedge spot price risks, and financial institutions can use options to enrich product investment strategies. Future agricultural product price insurance, bulk commodity warehouse receipt pledge, stock increase, major shareholder reduction, etc. You can lock in the benefits and risks in advance through options, and the application prospect is broad.
When teaching options abroad, most institutions tend to emphasize that the risk of buying options is limited and the risk of selling options is unlimited. Because most investors are risk-averse, they will naturally reject put options. In fact, mature investors will be more inclined to sell options, especially under certain market conditions, or for the specific needs of some customers, selling options will have more advantages, and its risk is not higher than that of ordinary linear tools (futures, forwards, etc.). ), its strategic effect will be more appropriate. In this paper, the difference between buying and selling options, the applicability of selling options and the position management of option sellers are comprehensively introduced, so that more investors can make good use of the double-edged sword of options.
The difference between call option and put option
Different from futures trading, option trading has three dimensions, namely, the direction of price movement, the changing direction of expected volatility and the attenuation of time value. When choosing an option strategy, we should analyze it one by one:
First, if you think the price will rise in the future, you can choose to buy call options or sell put options; If you think the price will fall, you can buy put options or sell call options.
Second, if the current volatility is at a low level and the expected volatility will increase, you can choose to call options. If you think that the current volatility is at a high level and the volatility is expected to decrease, then you should consider selling options.
Third, as the buyer of options, the time value is lost every day, and the gains brought by price changes and volatility changes must be greater than the passage of time value to make a profit, so the buyer of options can't wait for the market to falter every day. For the seller of options, he is charging the time value every day, hoping that the price will not move and it will be calm every day.
Option trading is similar to probability trading, and the expected value of risk and return is equal. According to the survey data of Chicago Mercantile Exchange, the probability of option expiration is about 75%, which means that the probability of profit from purchasing options is about 25%. To put it simply, suppose there are four states of price movement: big rise, small sideways rise, big sideways fall, and small sideways fall (the possibility of being completely motionless is very small). When the call option expires, the probability that the option is in a real state and the exercise income is higher is generally only a big rise or a big fall. For example, if you buy a call option, you will only make a profit when the price rises above the exercise price+option premium. For put options, on the contrary, the probability of being exercised is generally around 25%. For example, selling a put option will only be exercised when the price drops to the exercise price-option premium. So in terms of probability, the profit and loss probability (risk) of call option and put option is different.
In addition, from the perspective of profit, once the market is targeted, the profit of buying options may be as high as several times, while the maximum profit of selling options is only royalties, so the profits of the two are not equal.
In short, for call options, although the maximum loss is limited to premium, the potential income may be higher, but the probability of profit is usually relatively low. For selling options, although the biggest gain is only option premium, once the market trend is contrary to their expectations, the potential loss may be greater, but the probability of profit is greater. When investors choose the corresponding strategies, they must consider the probability of profit and the ratio of income to risk. There is no one strategy that is absolutely superior to another.
On the other hand, comparing futures operation with put option, assuming that the nominal amount is equal, regardless of the risk of volatility change, then the risk of put option is usually less than that of futures operation, and of course its maximum return will be less than that of futures. Suppose customer A opens more futures orders and customer B chooses to sell put options. Once the price falls, customer A will suffer losses, and customer B's biggest loss is the price drop minus the premium (considering the time factor, the farther away from the maturity date, the smaller the loss may be). Of course, if the price rises, the premium income of customer B selling options may be far less than that of futures bulls. Therefore, from the perspective of risk alone, selling options is not higher than the corresponding futures operation risk.
B what kind of customers are more suitable for selling options?
What market is suitable for selling options? First, price fluctuations are at a high level, market sentiment is gradually calming down, and positions have a downward trend. It is expected that the fluctuation will be lower in the later period. Second, under the current price, the price forms a new balance, and it is unlikely to break the existing balance in a short time. Third, whether from the fundamental or technical point of view, the current price range has a relatively strong pressure level or support level, and the price is unlikely to break through this position.
So, what kind of customers are more suitable for selling options?
First, the floating loss is quilted, and the option is used to solve the problem.
Take the black market in the fourth quarter of 20 16 as an example. Many customers start shorting prematurely, hoping to catch the top market, but the price trend is always unexpected. Prices have risen sharply for several days in a row, and there is basically no correction. Many customers have suffered huge losses, but they are unwilling to give up their chips. At this time, you can consider:
First sell a virtual put option, and the exercise price can be selected at the position where the futures short position is opened. If the price continues to rise, the option will not work, and the premium charged can partially make up for the loss. If the price drops sharply, although the option will lose money, the future position will gain more quickly. If the price keeps fluctuating sideways, there will also be income from option fees to make up for the losses.
The second is to buy a flat (or shallow) put option and sell two hypothetical put options with short (or slightly higher) execution prices, and the option premium will be very low or even zero. If the price continues to rise, these three put options are all empty, and the option operation does not add new risks. At maturity, if the price drops sharply and falls below the exercise price of the put option, both the put option and the short futures are profitable, while the two hypothetical options sold only lose money after the exercise price, and can be untied or even slightly profitable. If the price drops slightly, but does not fall below the exercise price of the hypothetical option sold, the put option bought will make money, and the short futures will also make money, but the hypothetical option sold will not exercise, which can speed up the liquidation.
Second, industrial customers with spot exposure can use options to pre-order at low prices or pre-sell at high prices.
For many industrial customers, using futures to hedge has become a mature model, which can help enterprises to lock in prices and avoid corresponding price risks. The disadvantage is that when the price fluctuates reversely, the futures will have a large floating loss, and the pressure of margin occupation and recovery will be greater, which may lead to the risk of liquidation.
Using options to hedge is to help enterprises "limit" prices, rather than lock in prices. It avoids the price change in the unfavorable direction, while retaining the potential benefits of the price change in the favorable direction, at the cost of paying a certain option premium. In other words, enterprises can also choose to sell options to obtain royalties, combine with spot exposure, sell imaginary call options above a certain pressure level, or sell put options below the support level, give up these small probability potential benefits, and collect fixed royalties. If the price breaks through the pressure level or support level, the profit of the enterprise's spot exposure can naturally hedge the risk of the option being exercised.
Take a copper smelting enterprise (or other enterprises that keep a certain inventory) as an example. When the copper price is 48,000 yuan/ton, an enterprise holds long exposure, and it is expected that the fluctuation of copper price will decrease in the short to medium term. The upper 50,000 yuan/ton is a relatively strong pressure level. Enterprises can choose to sell a call option with an exercise price of 50,000 yuan/ton. If the operation period is 3 months, they can collect 65,438 royalties.
If the copper price does not rise more than 50,000 yuan/ton, and the options sold by the enterprise do not work, the net royalty income will be 65,438+0,000 yuan/ton. If the price exceeds 48,000 yuan/ton, assuming it is 49,000 yuan/ton, the enterprise still retains the value-added income of 49,000-48,000 yuan/ton =1000 yuan/ton. If the copper price rises by more than 50,000 yuan/ton, for example, 52,000 yuan/ton, the enterprise will exercise the option and lose 2,000 yuan/ton, with a commission of 1.000 yuan/ton and a net loss of 1.000 yuan/ton, but the enterprise will still retain the value-added income of 4,000 yuan/ton on hand. In other words, the enterprise should give up the small probability potential income with a price above 50,000 yuan/ton in exchange for the royalty income of 1 10,000 yuan/ton. Of course, if the price falls, the enterprise will also have a price compensation of 1 1,000 yuan/ton, and there is no additional loss compared with doing nothing.
Similarly, for many processing enterprises, when the product order is confirmed, facing the risk of rising procurement costs, they can consider selling a virtual put option to realize the low-cost pre-purchase of raw materials. The principle is the same as above. Under a certain level of support below, the enterprise will get a fixed option fee income by giving up the potential benefits of reducing the procurement cost. If the price really falls, the enterprise can buy it at the previously expected price, with option fee as compensation; If the price rises, the option fee can partially make up for the rising procurement cost.
In a word, hedging with options can smooth the profit and loss curve of enterprises, speed up cash flow, smooth cash receipts and payments and improve the efficiency of capital utilization under the condition of controllable risks. Of course, there is no such thing as a free lunch. Between risk and royalty, you must choose to bear one of them.
Third, private investors or a few professional investors who have in-depth insights into the market.
Selling options can also be regarded as a professional strategy. Some institutions have achieved very good product returns by selling options and combining futures hedging. The main strategy is to select some varieties that fluctuate greatly at present and combine the recent pressure level or support level to carry out the corresponding put option operation.
When the price changes as expected, the time value is charged every day, and when the price reaches a favorable position, the position is closed in advance or the virtual option is sold for hedging. When the price judgment is wrong and close to the strike price, some or even all futures will be selected for hedging, and then dynamic adjustment will be made.
Take corn futures as an example. At the end of September last year, the market sentiment was pessimistic. In a short time, the price of corn dropped rapidly, falling below 1.400 yuan/ton, and the volatility increased simultaneously. Customer A thinks that the price of corn will not fall again in the short term, or fall below 1.360 yuan/ton, and is willing to open a position at the price of 1.360 yuan/ton, so he chooses to sell it at the execution price in 60 yuan. After that, the corn price rebounded higher, and the lowest price was only 1382 yuan/ton, so the safety margin was higher. Imagine that if the price really drops to around 1360 yuan/ton, customers need to stop loss or use futures tools for dynamic hedging.
Dynamic hedging will also have a certain loss probability. If the price falls to 1.360 yuan/ton, the risk of holding positions will be even greater. We can consider establishing an empty futures order at 1.360 yuan/ton. If the price has been falling well since then and the price rebounds to 1370 yuan/ton after the establishment of the empty order, it may be necessary to consider the empty order of flat futures; If the price falls to 1360 yuan/ton again, it may be necessary to open short positions to hedge, so that there will be relatively large losses after repeated times. Of course, if you really want to open more positions at this time, there is no need to hedge, and its loss will not be greater than the direct establishment of futures, but the income is relatively limited.
Position management after selling options
After selling the option, there will be two situations: First, the price conforms to the expected trend, and the time value is charged every day until the option expires. Second, if the price trend is contrary to expectations, you need to make the following operation choices according to the market:
The first is to close the position and stop loss. If the price breaks through the strike price near the pressure level or support level, it is expected that there will be a wave of market follow-up, and you can choose to close your position and stop loss.
The second is to move the warehouse to extend the term. When the price is close to the exercise price, hedging is more difficult. If you still insist on the view of the market, you can also consider closing the loss position first, and then choose a farther or more imaginary option to open the position.
The third is dynamic hedging. When the price is close to the strike price, if you feel that the market trend has exceeded your expectations, you can choose to hedge with futures. As shown in the put option selling corn above, the risk is that the price oscillates around the strike price. Or you can sell a call option with a higher strike price according to the judgment of the market and volatility, which may require continuous dynamic hedging in the future, which has higher requirements for investors.
The fourth is to limit losses. Buying a put option with a lower strike price protects the price from changing in an unfavorable direction, and it is still possible to return to the original equilibrium point, but the uncertainty is high. In order to avoid further losses, you can buy a put option with a lower strike price, limit the extent of losses, and keep the profit opportunity of the price returning to its original position again.
Rationality of D option hedging "loss"
When it comes to domestic industrial customers' hedging options, there are many negative comments, especially before 2008. Because a few domestic enterprises suffered great losses when trading options abroad, there is a view that options are too risky for enterprises to participate in. However, in my opinion, the option is only a tool in the final analysis, and the source of the problem is who uses this tool and how to use it.
Take airlines as an example, the fuel cost accounts for more than 40% of the operating cost. In the process of crude oil rising, the cost will continue to increase, and the ticket price will be inelastic, so the profit will be greatly affected, and even losses may be incurred year after year. Therefore, the hedging of crude oil is very necessary. However, there are no risk management tools related to crude oil in China, and most enterprises can only choose overseas markets to reach OTC options trading. The common transaction structure is that airlines buy a call option to avoid the risk of rising crude oil prices, and at the same time sell a virtual call option or a virtual put option to reduce the cost of option premium. In fact, the principle of selling options is to give up the option income with a sharp rise in price and the decrease in spot purchase cost after a sharp drop in price in exchange for the income from option royalties. To put it bluntly, it is to reduce the cost of royalties. Nothing for nothing. For option trading, you can choose to pay the cost or take the risk. Enterprises can choose the risks they can bear, which is not a problem in itself.
Adding put options to the option structure itself cannot be said to be speculation, because the loss of exercise options and spot gains can still correspond. At that time, the annual report of an airline showed that derivatives trading caused billions of dollars of losses, most of which were attributed to improper transaction matching, and this loss did not consider the potential profit and loss risk of the spot party. According to this logic, the same transaction structure must have brought a lot of profits to airlines in the rising crude oil market before 2008.
In short, since options are derivatives, they must be combined with the target. If it is speculation, you must participate with speculative ideas. If it is an industrial customer, it must be with the purpose of hedging. Option trading has certain professional requirements, so option market makers or service providers should provide in-depth counseling and adequate risk disclosure to customers, so as to provide risk management programs that meet their needs. From the customer's point of view, we should also "do what we can" and choose the transaction structure that we can understand and accept. You can't just covet cheap, and you can't give up eating because of choking.
Faced with options, investors should be more rational. Selling options is not a scourge, but has its rationality and value.