The definition of option is that you can buy an asset in the future at the price agreed in the option contract now, which can be tangible or intangible.

1. Understand what an option is?

suppose you are a farmer and have planted a large apple tree. You hope to sell Apple in the next few months, but you are worried that the market price may fall. To cope with this risk, you can use options.

now, you have reached an option transaction with a buyer. You sold a call option to the buyer, giving the buyer the right to buy your apple for $1 in the next three months. In exchange, the buyer pays you a fee as the price of the option contract.

In the next few months, several things may happen:

1. If the market price rises: If the market price rises to $15, the buyer can choose to exercise the option and buy your apple at $1. You need to fulfill your obligations according to the contract and sell the apple to the buyer for $1. This is a good deal for you, because the actual value of your apple exceeds the exercise price.

2. if the market price drops: if the market price drops to $8, the buyer will not exercise the option. Because the market price is lower than the exercise price, buyers are reluctant to buy apples at a price higher than the market price. In this case, you can choose to sell your apple at a higher price in the market, because you are not bound by the contract.

through this story, you, as a farmer, gained the right to protect the risk of falling prices of your agricultural products by selling call options. Even if the market price falls, you won't suffer losses, because you have already earned the option fee. Options provide you with a flexible risk management tool to protect your interests under uncertain market conditions.

II. Three key concepts of options

1. Exercise price: The exercise price is the price agreed in the option contract to buy or sell the underlying assets.

2. expiration date: the expiration date is the last effective date of the option contract, and the holder must exercise the option before this date.

3. premium: option premium refers to the fee or price paid when purchasing the option contract. It is the cost for the holder to obtain the option right. When an investor buys an option contract, he must pay a certain fee to the seller (or writer) of the option. This fee is called royalty.

iii. trading concept of option contract

trading of option contract refers to the process of buying and selling options of specific underlying assets between buyers and sellers.

1. Buyer: the buyer is a party to the option contract, and he pays the royalty to obtain the right to the option.

2. Seller: The seller is a party to the option contract, and he receives the royalty and undertakes the corresponding obligations.

3. Opening a position: when a buyer or seller buys or sells an option contract for the first time in the market, it is called opening a position. This means that they have entered a new option trading.

4. Closing a position: The buyer or seller sells or buys the same option contract in the market to cancel the previous position is called closing a position. This means that they have closed an existing option trading.

5. Exercise: the buyer's right to buy or sell the underlying assets at the agreed price on the expiration date according to the agreement in the option contract. This is called exercise. Exercise only applies to European options before the expiration date.

6. Expiration Date: the expiration date is the last effective date of the option contract. Before the expiration date, the buyer can choose to exercise the right, and the seller must abide by the obligations stipulated in the contract and expect the contract to be invalid.

iv. value classification of option contracts

1. At-the-money: when the exercise price of an option is equal to the market price of the underlying asset, the option is called a parity option.

2. In-the-money: For a call option, if the market price of the underlying asset is higher than the exercise price, the option is called a real option. For a put option, if the market price of the underlying asset is lower than the exercise price, the option is called a real option.

3. Out-of-the-money: For a call option, if the market price of the underlying asset is lower than the exercise price, the option is called a virtual option. For a put option, if the market price of the underlying asset is higher than the exercise price, the option is called a virtual option.

investors can choose suitable contracts from different values, and contracts with different values have different leverage effects.

V. Options have the following advantages

1. Leverage effect: options trading can provide smaller input costs, thus achieving greater capital gains. Because the option only needs to pay the premium rather than the full price of the underlying asset, investors can use leverage to expand the return on investment.

2. Risk limitation: When buyers buy options, they only need to pay royalties, so they can only lose the amount of royalties at most. This limits the risk of investors and provides protection for capital.

3. Flexibility: Option trading has high flexibility. The buyer can choose whether to exercise the option, while the seller must abide by the contract. This enables investors to make decisions according to market trends and their own needs.

4. Protective strategy: Options can be used as a tool for portfolio protection. Buyers can buy put options to hedge their existing portfolio risks, so as to get some protection when the market falls.

5. Profit opportunities: Option trading provides profit opportunities. The buyer can get capital profit by correctly predicting the market trend, while the seller can get income from royalties.

6. Diversified strategies: Option trading allows investors to adopt various strategies according to their investment objectives and market views. For example, the buyer can choose to buy a call option to benefit from the rising market or a put option to benefit from the falling market.

conclusion: options are diversified financial derivatives, and at the same time, they will also generate greater risks, such as the risk of total loss of the buyer's royalties, the risk of the loss of contract value, etc. It is suggested to learn more about the trading characteristics of options before investing and put them into trading.