Option refers to a contract, originated in the American and European markets in the late eighteenth century, which gives the holder the option to buy or sell an asset at a fixed price on a specific date or at any time before that date. right. The main points of option definition are as follows:
1. An option is a right. Options contracts involve at least two parties, a buyer and a seller. Holders enjoy rights but do not assume corresponding obligations.
2. The subject matter of the option. The underlying of an option is the asset that is chosen to buy or sell. It includes stocks, government bonds, currencies, stock indices, commodity futures, and more. Options are "derived" from these underlying objects, so they are called derivative financial instruments. It is worth noting that the option seller does not necessarily own the underlying asset. Options can be "short-sold". The option buyer doesn't necessarily want to buy the underlying asset either. Therefore, when the option expires, the two parties do not necessarily have to carry out the physical delivery of the underlying object, but only need to make up the price according to the price difference.
3. Expiry date. The day when the option expires agreed by both parties is called the "expiration date". If the option can only be exercised on the expiration date, it is called a European option; if the option can be exercised at any time before the expiration date, called American options.
4. Execution of options. The act of buying or selling underlying assets based on options contracts is called "execution". The fixed price agreed in the option contract by which the option holder buys or sells the underlying asset is called the "strike price".
Classification:
Due to the differences in options trading methods, directions, and underlying objects, there are many types of options. Reasonable classification of options is more conducive to our understanding of option products.
by rights
According to the rights of options, there are two types of call options and put options.
According to the types of options, there are two types of European options and American options.
Divided by exercise time
There are three types of European options, American options and Bermuda options.
Option: Option trading refers to the right that can be bought and sold in a certain period of time in the future. It is the right that the buyer has after paying a certain amount of premium to the seller. The right to quantity the subject matter, but not the obligation to buy or sell. Options are divided into European options and American options according to the exercise method.
1. For European options, the buyer holder can only choose to exercise the option on the expiration date.
2. For American options, the buyer can choose to exercise the option during the trading session after the transaction and before the expiration date.
Call options (Call Options) means that after the buyer of the option pays a certain amount of premium to the seller of the option, he has the right to buy a certain amount of specific rights stipulated in the option contract from the option seller at a price agreed in advance within the validity period of the option contract. The right to buy goods, but not the obligation to buy them. The option seller is obliged to sell the specific commodity stipulated in the option contract at the price stipulated in advance in the option contract at the request of the option buyer within the validity period stipulated in the option.
Divided by delivery time
According to the delivery time of options, there are two types of American options and European options. American option means that the right can be exercised at any time within the validity period stipulated in the option contract. European option means that the right can only be exercised on the expiration date stipulated in the option contract. The buyer of the option cannot exercise the right before the expiration date of the contract. After the deadline, the contract will automatically become invalid. China's emerging foreign exchange options business is similar to European options, but it is different. We will explain in detail in the lecture on China's foreign exchange options business.
According to the subject matter on the option contract,
there are stock options, stock index options, interest rate options, commodity options and foreign exchange options .
special type
The final return of a standard European option depends only on the price of the original asset on the day of expiration. The path-dependent option (path-dependent option) is a special option whose final return is related to the change of the original asset price during the entire option validity period. Path-related options can be divided into two categories according to the degree of dependence of their final income on the price path of the original asset: one is that the final income is related to whether the price of the original asset reaches a certain or several agreed levels within the validity period, called weak options. Path-dependent options; Another type of option whose final return depends on the information of the price of the original asset throughout the option's validity period is called a strong path-dependent option. The most typical type of weak path correlation options is the barrier option. Strictly speaking, American options are also weakly path-dependent options.
There are two main types of options with strong path correlation: Asian option and lookback option. The income of the Asian option on the expiration date depends on the average value of the price experienced by the original asset during the entire option validity period, and it is divided into an arithmetic average Asian option and a geometric average Asian option due to different meanings of the average; the final income of the lookback option Depending on the maximum (minimum) value of the original asset price within the validity period, the holder can "look back" at the entire price evolution process and select the maximum (minimum) value as the finalized price.
characteristic:
review
It has the characteristics of "zero-sum game", and both individual stock options and index options can be combined for arbitrage trading or hedging trading.
Options can be mainly divided into call options and put options. The former is also called a call option or a call option, and the latter is also called a short option or a put option. Specifically divided into four types: 1. Buy call (long call) 2. Sell call (short call) 3. Buy put (long put) 4. Sell put (short put)
Options trading is in fact the trading of such rights. The buyer has the right to execute or not to execute, and can choose flexibly. Options are divided into off-exchange options and on-exchange options. OTC option transactions are generally reached jointly by both parties to the transaction.
underlying asset
Each option contract has an underlying asset, and the underlying asset can be any of numerous financial products, such as common stocks, stock price indexes, futures contracts, bonds, foreign exchange, and so on. Usually, an option whose underlying asset is a stock is called a stock option, and so on. Therefore, options include stock options, stock index options, foreign exchange options, interest rate options, futures options, etc. They are usually listed and traded on stock exchanges, options exchanges, and futures exchanges. Of course, there are also over-the-counter transactions.
Option (Option), which is a financial instrument generated on the basis of futures. The greatest charm of this kind of financial derivative instrument is that it enables the buyer of the option to lock the risk within a certain range. In essence, the option is to price the rights and obligations separately in the financial field, so that the assignee of the right can exercise his right within the specified time whether to trade or not, and the obligatory party must fulfill it. In option trading, the party who buys the option is called the buyer, and the party who sells the contract is called the seller; the buyer is the assignee of the rights, and the seller is the obligor who must fulfill the buyer's exercise of rights. The specific pricing issues are more comprehensively discussed in financial engineering.
The commercial press "English-Chinese Securities Investment Dictionary" explains also as: option contract. Option contracts are trading contracts in which financial derivatives are used as the type of exercise. It refers to the right to buy and sell a certain quantity of trading varieties at a specific price within a specific time. The contract buyer or holder (holder) owns the right by paying a margin-option premium; the contract seller or writer (writer) collects the option premium, and when the buyer wishes to exercise the option, Obligations must be fulfilled. Option trading is an auxiliary means of investment behavior. When an investor is optimistic about the future market, he will hold a call option (call), and when he is bearish, he will hold a put option (put). Options trading is full of risks. Once the market develops in the opposite direction of the contract, it may bring huge losses to investors. In the actual operation process, most of the contracts have been closed before they expire (here refers to American options, while European options must be executed on the contract expiration date).
Options mainly have the following components:
① Execution price (also known as performance price, finalized price). The buying and selling price of the subject matter stipulated in advance when the buyer of the option exercises the right.
② Royalties. The option price paid by the buyer of the option, that is, the fee that the buyer pays to the option seller for obtaining the option.
③Performance bond. Option sellers must deposit financial security with the exchange for performance.
④ call options and put options. A call option refers to the right to buy a certain amount of the subject matter at the strike price within the validity period of the option contract; a put option refers to the right to sell the subject matter. When the option buyer expects the price of the underlying to exceed the strike price, he will buy a call option, and if he does not, he will buy a put option.
Each option contract includes four special items: underlying asset, option strike price, quantity and exercise time limit.
strike price
Option strike price (Strike Price or Exercise Price)
The price at which the underlying asset is bought or sold when the option is exercised. In most options traded, the price of the underlying asset is close to the strike price of the option. The exercise price is clearly stipulated in the option contract, and is usually given by the exchange in the form of a decrease or increase according to a certain standard, so there are several different prices for the same underlying option.
Generally speaking, when a certain option starts trading, each option contract will give several different execution prices at a certain interval, and then increase in time according to the change of the underlying asset. As for how many strike prices each option has, it depends on the price fluctuation of the underlying asset. When investors buy and sell options, the general principle for choosing the strike price is: choose the strike price that is actively traded near the price of the underlying asset.
quantity
The option contract clearly stipulates that the contract holder has the right to buy or sell the underlying asset quantity. For example, the number of stocks traded in a standard option contract is 100 shares, but there are exceptions in some exchanges. For example, in the option contract traded on the Hong Kong Stock Exchange, the number of underlying stocks is equal to the number of shares bought and sold per lot of the stock.
exercise time limit
Each option contract has an effective exercise period. If this period is exceeded, the option contract will become invalid. Generally speaking, the exercise period of an option ranges from one to three, six, or nine months, and the validity period of an option contract for a single stock is at most nine months. The expiration date of OTC options is tailored to the needs of buyers and sellers. However, in the options trading venue, any stock must be classified into a specific effective cycle, which can be divided into the following types: ① January, April, July, October; ② February, May, August and November; ③March, June, September and December. They are called the January cycle, February cycle and March cycle respectively.
According to the different execution time, options can be mainly divided into two types, European options and American options. European options refer to options that are only allowed to be exercised on the contract expiration date, and are used in most on-site transactions. American options refer to options that can be exercised on any day within the validity period after the transaction, and are mostly used in over-the-counter exchanges.
The difference between European style and American style
The difference between European options and American options is mainly in the execution time.
(1) American option contracts can be executed at any time before the expiration date or on the expiration date, and the settlement date is one or two days after the performance date. Most American option contracts allow holders to trade The contract can be performed at any time between the due date and the performance date, but there are also some contracts that stipulate a relatively short period of time to perform the contract, such as "two weeks before the due date".
(2) The European option contract requires its holder to perform the contract only on the due date, and the settlement date is one or two days after the performance. At present, domestic foreign exchange option transactions all adopt the European option contract method.
Through comparison, the conclusion is: European options have less cost and higher profits, but they are not flexible in the time of profit; American options are flexible, but the payment is very expensive. Therefore, most options transactions in the world are European options.
The difference between options and equity
Equity (limited liability company) and shares (joint stock company) are both owner rights enjoyed by shareholders based on shareholder qualifications. Simply put, getting equity means that you are already a shareholder of the company.
"Option" is a right, which is the right granted by the company to the incentive object to purchase a certain number of shares of the company at a predetermined price and conditions within a certain period of time in the future. This right may be exercised after the company goes public, or it may be exercised exercise. Simply put, getting an option only means that it may be a shareholder of the company.
Visually speaking, equity represents shareholders, while options exist more with the mission of motivation.
price:
Buying and selling with options will have the price of the option, and the price of the option is usually called "premium" or "option fee". The premium is the only variable in the option contract. Other elements in the option contract, such as: execution price, contract expiration date, transaction type, transaction amount, transaction time, transaction location, etc., are all stipulated in the contract in advance. It is standardized, and the price of options is obtained by traders bidding on the exchange.
Option prices are mainly composed of two parts: intrinsic value and time value:
1. Intrinsic value
Intrinsic value refers to the total profit that can be obtained if the contract is performed immediately. Specifically, it can be divided into real-value options, out-of-the-money options and equal-value options.
(1) Real options
An option is in the money when the strike price of a call option is lower than the actual price at the time, or when the strike price of the put option is higher than the actual price at the time.
(2) Out-of-the-money options
An option is out-of-the-money when the strike price of the call option is higher than the actual price at the time, or when the strike price of the put option is lower than the actual price at the time. When an option is out-of-the-money, the intrinsic value is less than zero.
(3) Equity options
When the exercise price of the call option is equal to the actual price at that time, or when the exercise price of the put option is equal to the actual price at that time, the option is at-the-money. When the option is at-the-money, the intrinsic value is zero.
2. Time value
The longer the option is from the expiration date, the greater the possibility of a large price change, and the greater the chance for the option buyer to execute the option to make a profit. Option buyers pay a higher premium for longer-dated options than for shorter-dated options.
It is worth noting that the relationship between the premium and the expiration time is a nonlinear relationship, not a simple multiple relationship.
The time value of an option decreases as the expiration date approaches, and the option expiration date has a time value of zero.
The time value of an option reflects the time risk and price fluctuation risk during option trading. When the contract is 0% or 100% fulfilled, the time value of the option is zero.
Time value of option = option price - intrinsic value
3. The price difference between in-the-money options, out-of-the-money options and equal-value options
Out-of-the-money options and at-the-money options have an intrinsic value of zero.
The time value of the maturity date is zero.
Billing Type:
1. Stock settlement method
In stock trading, if an investor wants to buy a certain number of stocks, he must pay all the fees immediately to obtain the stock. Once the stock price rises after buying the stock, the investor must also sell the stock to obtain the profit from the price difference. Therefore, its settlement requirements are: the transaction can only be achieved by paying in cash immediately, and the profit and loss can only be realized when the subject matter is no longer held after the transaction is completed. In the options market, the stock class settlement method is very similar.
The basic requirements of the stock settlement method are: the option premium must be paid in cash immediately, and as long as the position is not hedged, the profit and loss cannot be realized. This settlement method is mainly used in the trading of stock options and stock index options. The settlement procedure of the option contract is roughly the same as that of the underlying asset.
2. Futures settlement method
The settlement method of futures is very similar to the settlement method of the futures market, and also adopts the daily settlement system. The futures market usually adopts this settlement method.
However, due to the high risk of adopting futures-based settlement methods, many exchanges only adopt futures-based settlement methods in futures and options transactions, while still adopting stock-based settlement methods in stock options and stock index options transactions. In this way, the settlement procedures of option transactions can be greatly simplified because the settlement procedures of options and their underlying assets are the same.
contract:
The so-called option contract refers to a kind of option buyer who, after paying a certain amount of premium to the option seller, obtains the right to buy or sell a certain amount of related commodity futures contracts within a specified period at a pre-agreed price. Standardized contracts, the buyer may also waive this right if desired. The main elements of an option contract are as follows: buyer, seller, premium, strike price, notice, and expiration date.
Option exercise
There are three situations for option performance
: 1. Both the buyer and the seller can implement the contract through hedging.
2. The buyer can also perform the contract by converting the option into a futures contract (obtaining a corresponding futures position at the strike price level stipulated in the option contract).
3. Any option that expires and is not used will automatically become invalid. If the option is out-of-the-money, the option buyer will not exercise the option until the option expires. In this way, the option buyer loses at most the premium paid.
option premium
As mentioned earlier, the option premium is the price at which the option contract is purchased or sold. For the option buyer, in exchange for certain rights granted to the buyer by the option, he must pay a premium to the option seller; for the option seller, he sells the option and assumes the obligation to perform the option contract, for which he Receive a royalty as compensation. Since the premium is borne by the buyer, it is the maximum amount of loss that the buyer needs to bear in the event of the most unfavorable change, so the premium is also called "insurance money".
trade:
If you buy a call option with a certain strike price, you can enjoy the right to buy the relevant futures after paying a small premium. Once the price really rises, the call option will be exercised to obtain a long futures position at a low price, and then the relevant futures contract will be sold at a high price according to the rising price level to obtain a profit from the difference, and there will be a profit after making up for the premium paid. If the price falls instead of rising, the call option can be given up or transferred at a low price, and the maximum loss is the premium. The maximum loss should be the difference between the premium received and the premium paid.
The reason why the buyer of the call option buys the call option is because through the analysis of the price changes of the relevant futures market, he believes that the price of the relevant futures market is likely to rise significantly, so he buys the call option and pays a certain amount. Premium. Once the market price really rises sharply, then he will get a larger profit by buying futures at a low price, which is greater than the amount of premium he paid for buying options, and he will eventually make a profit. Sell the option contract at the premium price, so as to hedge the profit.
If the buyer of the call option is inaccurate in judging the price movement trend of the relevant futures market, on the one hand, if the market price only rises slightly, the buyer can perform the contract or hedge to obtain a little profit to make up for the loss of premium payment; on the other hand, if the market price If the price falls, the buyer will not perform the contract, and its biggest loss is the amount of premium paid.
Risk indicators:
On the basis of qualitative analysis of the influencing factors of option prices, through option risk indicators, assuming that other influencing factors remain unchanged, the dynamic impact of a single factor on option prices can be quantified. The risk indicators of options are usually expressed in Greek letters, including: delta value, gamma, theta, vega, rho, etc. For option traders, understanding these indicators will make it easier to grasp the changes in option prices and help measure and manage position risks.
Delta value: measures the change in option price when the price of the underlying asset changes
Gamma value: When measuring the price change of the underlying asset, the change range of the option Delta value
Theta : A measure of how much an option's price has changed over time
Vega value: Measures the change in option price when the volatility of the underlying asset price changes
Rho : A measure of how much an option price changes when interest rates change