Investors who have traded futures may be familiar with leverage. Simply put, they can trade a lot of assets with a small amount of money.
For example, in the futures market, you only need to pay a deposit of 10% to trade goods with a face value of 100%. The occupied funds (that is, the margin) will be enlarged, and its leverage calculation will be easier, that is, the ratio of commodity value to margin is the leverage ratio.
However, how to calculate the leverage of options? Let's take a concrete example and intuitively feel the leverage effect of options.
In the financial derivatives market, leverage ratio is the ratio of the actual value represented by derivatives to the amount of cash paid to establish positions. The higher the leverage ratio, the greater the profit or loss caused by the price change of each unit of basic assets, which means the higher the investment risk. Based on the nonlinear profit and loss structure of options, we need to understand the leverage ratio of options from two aspects: cost and yield.
The leverage ratio of each option contract is not fixed, and the contract leverage ratio is equal to the ratio of the percentage change of the option price to the percentage change of the underlying asset price, that is, the underlying asset price changes by one percentage point, and the option price changes by g percentage point (G stands for leverage multiple). S and C represent the underlying asset price and option price respectively, and S and C represent the changes of the underlying asset price and option price respectively. Then,
This formula shows that the leverage ratio of the option depends on the change of the option price relative to the underlying asset price. For the same option contract, different exercise prices or expiration times may lead to different leverage ratios. Generally speaking, the leverage ratio of real options (options with exercise price close to the underlying asset price) is small, while the leverage ratio of imaginary options (options with exercise price far from the underlying asset price) is large.
From the perspective of cost, option leverage ratio is equal to the ratio of the current price of the underlying 50ETF to the option premium, which is also the traditional definition of leverage ratio. When the price of the underlying 50ETF is 252 10/ 10000, the price of 10006027 is 425 yuan and the leverage ratio of the option is 6 1.84. He said that for every 2.500 options worth 3,425 yuan, he can buy 1 10,000 50ETF index funds worth 25,000 yuan.
Because the profit and loss structure of options is nonlinear, the leverage ratio of options is not equal to the rate of return when the underlying asset price fluctuates, so we can understand the leverage ratio from the perspective of the rate of return, which is usually called the real leverage ratio.
The true leverage ratio is defined as follows:
Real leverage ratio = option yield/underlying asset (such as 50ETF) yield = cost leverage ratio × Delta
Here, Delta represents the Delta value of the option, that is, the rate of change of the option price relative to the price of the underlying asset. The real leverage ratio reflects the actual profitability of options, because it considers the nonlinear characteristics of options.
Obviously, compared with the cost leverage ratio, the real leverage ratio reflects the option profitability more truly.
Characteristics of option leverage
As mentioned earlier, option leverage is dynamic, so what is its changing law?
First of all, the leverage of options is related to the time value. In the life cycle of the contract, the time value will gradually decrease with the passage of time, so the leverage of the option will change. At the beginning of the contract, the time value is relatively high and the leverage is small. But with the passage of time, the decay of time value will lead to the increase of leverage, especially when the maturity date is approaching, the leverage will become more significant.
Second, different contracts have different levers. The leverage nature of option contracts will change with the contract type and maturity date. At the beginning of a one-month contract, a flat contract usually has a high leverage, because its time value is high, and its leverage will decrease with time. On the contrary, in the middle and late period, virtual contracts usually have higher leverage because of their relatively low time value, but when the price changes, its leverage effect is more obvious.
Generally speaking, the leverage of options is about 20 times, that is, if the price of underlying assets (such as 50ETF) rises by 1%, the price of related option contracts may rise by 20%. However, it should be noted that the leverage may change, even more than 100 times, in combination with the remaining contract time and different contract types (closed or empty contracts).
Option leverage generally follows the following characteristics:
(1) hypothetical option contract, the greater the leverage; In real option contracts, the smaller the leverage.
(2) The leverage of options is dynamic, and its value only represents the leverage level in a short time, not forever.
No matter how long the option is held, the final actual leverage level will generally not exceed the ratio of futures price to option price when the position is first opened. Therefore, there is generally no need to worry that the final leverage level is uncontrollable after the completion of the position.
In short, for short-term traders, especially option speculators, due to the short holding time, we should focus on the change of option leverage (actual leverage ratio). For investors who hold options for a long time, they should not only pay attention to the change of option leverage, but also pay attention to the ratio of futures price to option price (leverage ratio) when opening positions, which is generally the upper limit of the ultimate leverage of options.
The above figure shows the change of option leverage with different remaining maturities. It can be known that option leverage generally has the following laws over time:
(3) Under the same conditions, with the passage of time, the time value of the option will gradually decrease, leading to a decrease in the price of the option. This makes the leverage of options gradually increase. At the beginning of the contract, the time value is high and the leverage is small; As the maturity approaches, the decrease of time value will lead to the increase of leverage.
(4) With the decrease of the remaining time, the leverage change of options gradually accelerates. This is determined by the acceleration of price fluctuation and Delta value (the rate of change of option price relative to the underlying asset price) of options approaching maturity. As the expiration date approaches, the leverage of options may become very large, especially when the expiration date is very close.
For investors with extreme risk preference, they may wish to trade options within one week and be their buyers. If you are afraid of a rapid decline in value near maturity, you might as well buy a more realistic option. Although it is in real value, its leverage effect is still much higher than futures. Also, try not to buy options with a deep imaginary value that are about to expire. Although you have super-high leverage, the probability of winning at maturity is extremely low.