Options are contracts between two parties regarding the right to buy or sell in the future. For individual stock options, the buyer of the option obtains a right by paying a certain fee to the seller, that is, the right to buy or sell an agreed number of specific stocks or ETFs to the option seller at an agreed time and at an agreed price, as explained below. To popularize the basic knowledge that everyone must know about investing in options. This article comes from: Option Sauce
1. What are the types of options?
According to different standards, individual stock options are divided into many types. The following categories are introduced below.
1). According to the rights of the option buyer, it is divided into call options and put options.
A call option means that the buyer of the option (the right party) has the right to purchase a certain amount of the underlying asset from the seller (the obligated party) at an agreed time and at an agreed price. The buyer enjoys the right to buy.
A put option means that the buyer (right party) of the option has the right to sell a certain amount of the underlying asset to the seller (obligated party) of the option at an agreed price at an agreed time, and the buyer has the right to sell.
For example: Mr. Wang buys a call option on a certain stock with an exercise price of 15 yuan. When the contract expires, no matter what the market price of the stock is, Mr. Wang can buy the corresponding number of shares at a price of 15 yuan per share. the stock.
Of course, if the market price of the stock falls below 15 yuan per share when the contract expires, Mr. Wang can give up the exercise and lose the premium paid.
2) According to the time limit for the option buyer to execute the option, it is divided into European options and American options.
European options are options that the option buyer can only exercise on the expiration date of the option.
American options refer to options that the option buyer can exercise on the trading day before the option expires or on the expiration date.
American options and European options are divided based on exercise time. In comparison, American options are more flexible than European options, giving the buyer more choices.
3) According to the relationship between the exercise price and the market price of the underlying security, they are divided into real-valued options, at-the-money options and out-of-the-money options.
Real-money options, also known as in-the-money options, refer to a state in which the exercise price of a call option is lower than the market price of the underlying security, or the exercise price of a put option is higher than the market price of the underlying security.
At-the-money options, also known as at-the-money options, refer to a state in which the exercise price of the option is equal to the market price of the underlying security.
Out-of-the-money options, also known as out-of-the-money options, refer to a state in which the exercise price of a call option is higher than the market price of the underlying security, or the exercise price of a put option is lower than the market price of the underlying security.
For example: for a stock call option with an exercise price of 15 yuan, when the market price of the stock is 20 yuan, the option is a real-valued option; if the market price of the stock is 10 yuan, the option is an out-of-the-money option; if the stock If the price is 15 yuan, the option is at-the-money.
2. Basic knowledge that you must understand when investing in options
1. Definition of options : An investment option is a contract that gives the holder the right to buy (call option) or sell (put option) a specific asset (such as stocks, commodities, bonds, etc.) at a pre-agreed price. , and this right is not enforced before the expiration date.
2. Types of options : call options and put options
3. What is the difference between option buyers and sellers?
Theoretically speaking, the option buyer has unlimited returns and limited risks; the option seller has limited returns and unlimited risks. Because the option buyer can choose to exercise the option, or he can choose not to exercise the option; and the seller has the obligation to exercise the option. Therefore, when the market fluctuates greatly, the seller's loss is very large; and the buyer's biggest loss is the premium.
There are generally two ways to exercise options: European options and American options.
European options: The option buyer can only exercise the option on the expiration date.
American options: The option buyer can exercise the option at any time during the option period, that is, any transaction before the expiration date (including the expiration date).