First, the meaning of option contracts
1. option contract was born in Chicago Board Options Exchange 1973. This is also an option. It is a trading contract with financial derivatives as the exercise variety, which refers to the right to buy and sell a certain number of trading varieties at a specific price within a specific time.
2. The buyer or the contract holder has the right to pay the deposit option fee; The contract seller or obligee (obligee) collects the option fee, and when the buyer wishes to exercise his rights, he must fulfill his obligations.
3. Market characteristics of option contracts Option contracts are the most important derivative financial instruments besides futures contracts.
Second, the constituent elements
1, transaction unit
The most successful option contract refers to the number of targets represented by each option contract.
2. The lowest price change
Refers to the lowest unit of royalty price change when buyers and sellers bid.
3. Maximum daily price fluctuation limit
It means that the fluctuation price of premium of option contract in a trading day shall not be higher or lower than the specified fluctuation range, and the quotation beyond this fluctuation range shall be deemed invalid.
4. Executive price
Refers to the pre-specified buying and selling price when the option buyer exercises his rights. Once this price is determined, the option seller must fulfill his obligations at this exercise price, no matter what level the market price of the subject matter of the option contract rises or falls within the validity period of the option, as long as the option buyer requests to exercise the option.
5, the implementation of price interval.
Refers to the difference between two adjacent strike prices, which is stipulated in the option contract. The hard winter wheat option contract designed by Zheng Shang stipulates that at the beginning of trading, the following exercise prices will be listed as integer multiples of the standard specified in the exercise price range: the exercise price closest to the settlement price of the previous day of the relevant hard winter wheat futures contract (whichever is greater), as well as three consecutive exercise prices higher than this exercise price and three consecutive exercise prices lower than this exercise price.
6. Contract month
Refers to the trading month of the option contract. Different from futures contracts, in order to reduce the impact of option execution on the underlying futures trading, the expiration date of option contracts is generally one month before the contract month.
7. Last trading day
Refers to the last day when an option contract can be traded.
8. Maturity date
Refers to the last day when the option buyer can exercise his rights.
9. royalties
Option fee, also called option fee and option fee, is the price of option. Option fee is the only variable in the option contract, which is formed by the open bidding of buyers and sellers in the international option market. It is the fee that the buyer of the option must pay to the seller in order to obtain the rights conferred by the option contract. For the buyer of the option, the premium is the biggest loss. For option sellers, selling options can earn a royalty income without immediate delivery.
10, execution price
The exercise price refers to the pre-specified buying and selling price when the buyer of the option exercises his rights. After the exercise price is determined, there is no option contract to discuss how the price fluctuates within the time limit stipulated in the option contract. As long as the buyer of the option requests to exercise the option, the seller of the option must perform the obligation at this price. For example, when an option buyer buys a call option, the price rises and is higher than the strike price within the validity period of the option contract, and the option buyer has the right to buy a specific commodity at a lower strike price. The option seller must unconditionally perform the selling obligation at a lower exercise price. For foreign exchange options, the exercise price is the exchange rate specified in advance by the buyer of foreign exchange options when exercising.
1 1, contract expiration date
The expiration date of the contract refers to the latest date that option contracts must perform. European options stipulate that Japanese can only exercise options when the contract expires. American options stipulate that options can be exercised on any trading day (including the contract expiration date) before the contract expiration date. The validity period of the same kind of option contract is different, which is divided into different time periods such as week, quarter, year and continuous month.
Third, the main features
Market characteristics of 1. Option contract is the most important derivative financial instrument besides futures contract. In hedging, futures contracts offset potential losses and potential gains. The biggest difference between options and futures is that options only offset the potential risk of loss, and do not prevent the holder from gaining income. In order to obtain such a favorable risk, the buyer of the option needs to pay a fee to the seller (blank writer), which we call premium. When we buy and sell futures, we don't have to pay any amount to the counterparty except commission.
2. Options can be divided into call options and put options according to the degree of risk aversion. A call option allows the buyer to buy goods from the option seller at a specific time or at a specific price in the future, while a put option allows the buyer to sell goods to the option seller at a specific time or at a specific price in the future. This pre-agreed price is called the execution price. According to the execution time limit, options can also be divided into American options and European options. The owner of American options can exercise at any time before the expiration date, while European options can only exercise on the expiration date.
3. Option contract Futures option is an option contract with futures contracts as delivery commodities, which means that the owner of the option has the right to buy or sell a specified number of futures contracts at a pre-agreed futures price on the expiration date. The actual meaning of "buying" here is that the owner and seller of the option reach a new futures contract according to the pre-agreed futures price. If it is a call option, in the new futures contract, the owner of the option is multiple and the seller of the option is empty. If the pre-agreed futures price is different from the current futures price, both parties to the transaction will settle immediately, and the empty party will pay the difference between the current futures price and the agreed price to many parties.
4. Futures options may also be cash delivery, that is, the two parties do not conduct futures trading, but directly settle the price difference.
Swap option is an option with a swap agreement as the delivery product, which means that the owner of the option has the right to reach a swap agreement with the seller of the option at the pre-agreed interest rate on the expiration date. There are many ways to settle the swap agreement, including physical settlement and cash settlement. Physical settlement means that the owner exercises his rights on the expiration date and reaches an exchange agreement with the seller of the option. The owner of the option can execute this agreement until the end of the period, or reverse the operation in the swap market to realize the interest difference. Cash settlement refers to the direct settlement of the present value of the interest difference without signing the swap agreement. TAPOs is designed for a fixed period of time. For the average price option of LME trading, it is based on the monthly settlement price (MASP). These options automatically terminate at the end of the pricing period, and the profitable TAPOs is converted into two futures contracts with equal quantity and opposite directions, one of which is the monthly settlement price and the other is the initial strike price.
Fourth, differences and contrast.
1. Option contracts can be bought and sold in the market. Option contracts are one-way contracts. The buyer of the option obtains the right to purchase after paying a certain insurance premium, but he can have the right to abandon the contract at any time after the transaction is established, that is, he will not fulfill this right at the expense of paying the negotiated insurance premium. The seller of the option has the obligation to deliver when the buyer demands performance, and has no right to demand performance when the buyer decides not to perform. The rights and obligations of both parties are asymmetric. Ordinary futures contracts are two-way contracts. Once their long or short positions are established, both parties to the transaction will undertake the delivery obligation when the futures contract expires. If you don't want to deliver, you must hedge before the contract expires and end the long or short position. The most important difference between the option contract and the general futures contract is that there is a "knock price" in the option contract, but the general futures contract does not and does not need to have it.
2. The "strike price" in option trading, also known as the strike price, refers to the price of buying or selling related option contracts at the agreed price of call options or put options. Specifically, it refers to the price at which the buyer who buys the option buys the relevant option contract or the buyer who sells the option sells the relevant option contract according to the contract. In option trading, every buyer who buys options has a seller who sells options, and every buyer who sells options has a seller who sells options. In order to facilitate the transaction between buyers and sellers, the option contract lists the "final price" that both parties should abide by.
This price is determined by the exchange according to a certain mechanism. Except for some special circumstances, this price will not change during the contract period. In the market, buyers and sellers decide the commission (or insurance premium, insurance premium), not the final price. In the futures contract, the futures price is determined by the supply and demand sides of the market, and the futures price changes at any time due to the fluctuation of the strength of both sides. When the futures contract is concluded, its value is zero, so there is no cash transfer between the two parties, and the deposit paid by both parties is only used as compensation for breach of contract; When option contracts is concluded, the buyer must pay the royalties to the seller, but there is no need to pay the deposit, because the buyer has the right to breach the contract. As for the seller of options, although he has royalties, he has to pay a deposit.
4. The subject matter of options contracts and futures is much the same, but an important difference is that there are options with futures as the subject matter, that is, futures options, but there is no futures with options as the subject matter. Because the futures price is determined by the market, there can only be one futures price at any time, so when creating a contract type, only the delivery month can be changed, and the exercise price of the option is determined by the exchange. At any time, there may be various contracts with different exercise prices, and then through different rights periods, options contracts that are several times as many as futures contracts can be produced. Finally, because of the asymmetry of rights and obligations, there are two categories: call right and put right, so options are much better than futures in creating financial products.