This is how futures and options contracts are designed. Built-in leverage is not created out of thin air. Futures and options are defined as leveraged transactions. When designing the contract, leverage is already included in the design. It comes with leverage. "Option trading is more complicated. It is recommended to learn and understand it first, and be familiar with it first! So why do options have leverage? What is the leverage effect of options?
Options themselves have a leverage effect. The so-called leverage effect of options means that the percentage of price fluctuations of an option contract has a considerable magnifying effect relative to the percentage of price changes of the underlying asset.
The leverage of options is the right to trade at the execution price in the future, so the premium is used to leverage. For example, the current price of 50ETF is 3.8 yuan, and the exercise price of the 50ETF September subscription contract is 3.9. The premium is 180 yuan per contract, which is equivalent to using 180 yuan to leverage 38,000 yuan of 50ETF.
1. How to calculate the leverage of options?
The leverage ratio of an option is relative to the change in the price of the underlying asset, so the leverage ratio of the contract is equal to the ratio of the percentage change in the option price to the percentage change in the underlying asset price.
Leverage ratio = (underlying asset price/option price)*Delta
As can be seen from the above formula, the leverage ratio of options is related to the underlying price, option price, and delta, so the leverage ratios of different contracts are different. At the same time, because the underlying price is also changing in real time, the leverage ratio of the same contract is also changing.
When it comes to delta, let’s briefly talk about the meaning of the Greek letter Delta: the change in option price caused by the price change of each unit of the underlying security. The value range of call options is 0-1, and the value range of put options is -1-0.
2. Why do options have leverage?
The option leverage effect means that investors can leverage higher-value underlying assets by paying less premium. This refers to the cost leverage of options. Cost leverage refers to the ratio of the price of purchasing spot goods to the premium. The higher the premium, the higher the premium. The lower, the greater the leverage.
In addition, there is profit leverage, which is used to express the ratio of the trader's actual profit and loss to the profit and loss of the underlying asset when the underlying price changes. So why do options have leverage?
Options come with built-in leverage. The option buyer only needs to pay a smaller premium to obtain benefits from fluctuations in the underlying asset of higher value, but the option seller does not need to pay a margin. The option seller needs to pay a margin to open a position. This is because the option seller needs to fulfill his obligations, so there is also leverage.
Maybe when leverage is mentioned, the first reaction is to be repulsed, and it is understood as an amplification of risks and the possibility of liquidation. However, the leverage of 50ETF options is different from the leverage of other products. As an option buyer, its high leverage ratio is only reflected in In terms of income, there is no risk of liquidation. For investors who have done capital allocation before, the high leverage feature of 50ETF options is inherent in the product, rather than blessed by external factors, and does not require high personal payments. amount of interest.
The leverage characteristics of options were mentioned earlier. Although they are leveraged like futures, futures will have the risk of liquidation, but options will not liquidate. For option buyers, what they get after paying the premium is rights. Options have The contract period is limited. If you buy and open a position within the contract period, the contract will not be liquidated or liquidated. You can hold it with confidence.
When the underlying 50ETF rises or falls by 1%, the contract price fluctuates by 30-50% on average, or even higher. If you read the right direction of the index and hold a certain option contract, then this contract may bring you more than ten times or dozens of times profit within a week or two, and the profit of the contract principal on that day will be 10 times. It happens often, and even on the highest day in February 2019, the contract surged 192 times.
Investment tips:
1. Choose a contract that is recommended to be at or near the next level above or below par. The price is moderate, the position is large, the trading is active, and the volatility is relatively high. An at-the-money contract is the easiest to turn into a real-valued contract.
2. Options are more suitable for intraday swing or short-term operations. Just choose the contract of the current month. For long-term trend operations, it is recommended to choose the contract of the next month or longer (the loss of time value is slower)
3. If you are looking at big rises and big falls, you can choose a contract that is slightly out-of-the-money. If the volatility is large, it can better reflect the high leverage characteristics of options and drive the rise of out-of-the-money contracts. Otherwise, refer to Article 1.
4. There is no way to open SSE 50 ETF options-GEM ETF options-Kechuang 50 ETF options-stock index options-commodity options!
For more information about option opening accounts, there are also some exemption methods that can be opened without threshold. If you are interested in this aspect, you can obtain the options opening method.