The following are the basic principles of options trading:
1. Rights and obligations: Option is a financial instrument, which gives the buyer the right to buy (call option) or sell (put option) a certain number of underlying assets at an agreed price at a certain time in the future, but not the obligation. When the buyer chooses to exercise his rights, the seller is obliged to perform delivery or settlement.
2. Option contracts: Option transactions are conducted through option contracts, which stipulate important terms such as the underlying assets, exercise price and exercise date. Standardization in option contracts usually covers a certain number of basic assets.
3. Call option and put option: Call option grants the buyer the right to purchase the underlying assets, and put option grants the buyer the right to sell the underlying assets. When the buyer chooses to exercise his rights, the seller must fulfill the obligation of delivery or settlement.
4. Exercise and settlement: On the expiration date of the option, the buyer can choose to exercise the right to execute the option contract and actually buy or sell the underlying assets. After the exercise, the underlying assets will be delivered or settled at the price agreed in the contract. If the buyer chooses not to exercise the right, the option will automatically become invalid when it expires, and no rights and obligations will arise.
5. Option pricing: The price of the option (also called premium or premium) depends on many factors, including the price of the underlying asset, exercise price, remaining time, market volatility and so on. Option pricing models, such as Black-Scholes model, are used to calculate the theoretical price of options.
6. Buyers and sellers: Buyers are usually speculators or hedgers who pay royalties to buy options in order to profit from price fluctuations or hedging risks. On the other hand, the seller is usually the author of the option. They assume obligations and collect royalties, hoping that their rights will not be exercised on the expiration date of the options.
7. Markets and exchanges: Option trading is conducted in various financial markets and exchanges, which provide trading platforms and clearing services in option contracts. The exchange stipulated standardized option contracts to improve liquidity and market transparency.
8. Risk management: Option trading can be used for risk management, and investors can hedge or increase the risk of portfolio by buying or selling options. Different options strategies can meet different risk management needs.
Generally speaking, option trading is a financial tool, which allows investors to participate in the market by paying royalties according to their own market expectations and risk preferences, and exercise their rights or fulfill their obligations in the future. Option trading requires a deep understanding of the characteristics, pricing model and market mechanism of option contracts in order to make wise investment decisions.
: Four basic trading strategies
Strictly speaking, options have four trading directions, namely, buying call options and buying put options, which are called as buyers; Selling call options and put options is called seller.
Buy call option
Option holders can buy an asset call option with a certain price X by paying a premium C, and have the right to buy or not to buy the relevant subject matter before the expiration date. Buying a call option is a strategy with limited losses and unlimited profits. The holder has three possible decisions: first, to fulfill the contract. When the price rises above the exercise price, investors can exercise the call option, obtain the long position of the subject matter at a low price, and then sell the relevant subject matter at a high price according to the rising price level. Profit from the spread. The second is to close the position. When the price rises, you can also sell the option to close the position, thus obtaining the premium spread income. The third is to give up rights. If the price does not rise but falls, and the price is lower than the exercise price, in addition to closing the position to limit the loss, you can also give up your rights.
Buy put option
Investors can buy a put option with an exercise price of X by paying a premium C, and have the right to sell or not to sell the relevant subject matter before the expiration date. Buying a call option is theoretically a strategy with limited losses and limited profits. The holder has three possible decisions: first, to fulfill the contract. When the price falls below the exercise price, he can exercise the put option, sell the subject matter at a high price in the option market, and then buy the relevant subject matter at a low price in the spot market according to the falling price level. Profit from the price difference. The second is to close the position. When the price falls, you can also sell the option to close the position, thus obtaining the premium spread income. The third is when the right is given up and the price rises instead of falling. In addition to closing positions to limit losses, you can also give up your rights.
Sell call option
Selling a call option at a certain exercise price X gets a premium C, and selling a call option gets an obligation, not a right. If the buyer of the asset call option requests to exercise the option, then the seller must fulfill the obligation of selling and sell the option. Call option is a strategy with limited profit and unlimited loss. For investors, there are two possible decisions: first, implementation. When the price rises above the exercise price, the option buyer demands the exercise, and the option seller will be forced to accept the option performance and sell the subject matter at the exercise price. At this time, because the rising price level is higher than the exercise price, the seller will have a price difference loss, but the commission income will partially make up for the price difference loss. The second is to close the position. Before the buyer fails to perform the contract, the seller can subscribe for the assets in full and close the position at any time, thus obtaining the gains or losses of the premium price difference.
Sell put option
Selling a call option at a certain exercise price x gets a premium p, and selling a put option gets an obligation, not a right. If the buyer asks to exercise the option, then the seller must fulfill the purchase obligation. Selling put option is a strategy with limited profit and limited loss. Investors have two possible decisions: one is to be cashed. When the price falls below the exercise price, the option seller will be forced to accept the option performance and obtain the long position of the subject matter at the exercise price. At this time, if the relevant subject matter is sold at a high price at the falling price level, the price difference loss will occur, but the exercise income will partially make up for the price difference loss. The second is to close the position. Before the buyer puts forward the performance, the seller can close the put option at any time, thus obtaining the premium spread, gain or loss.