Introduction to Options

标准共识

特邀专栏作者

2020-05-18 18:21 (UTC+8)

This article is about 4688 words, reading the full article takes about 7 minutes

This article will mainly talk about call options and put options and their basic applications through two stories.

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This article will mainly talk about call options and put options and their basic applications through two stories.

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This article will mainly talk about call options and put options and their basic applications through two stories.

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The Tulip Mania of 1636

The European tulip mania of 1636 is a classic economics and finance case study in which a surge in demand caused a single commodity to soar to ridiculous prices. The surge in prices kicked off the first large-scale options trade on record.

In the 17th century, tulips, imported to Europe from Turkey and the Netherlands, quickly became symbols of wealth and beauty. At the time, tulips were like designer clothes and watches, wanted by people from all walks of life. Due to the huge demand for tulips, the demand for tulip bulbs from growers and dealers has also multiplied, driving up prices for producers. Since the price of tulip bulbs was rising almost every day, dealers in Holland, the largest producer of tulip bulbs at that time, began to trade tulip bulb options. Traders only needed to pay a certain option fee to have the right to buy tulip bulbs in advance, and Secure a firm buy price.

This is a call option on a tulip bulb. From the end of 1636 to February 1637, the price of tulip bulbs soared, and what was supposed to be a way to hedge producers' risk turned into a speculative frenzy. The massive speculative interest in tulip bulbs has led people from all walks of life to spend all they have on these tulip bulbs even if they sell or mortgage their homes.

"All violent pleasures will come to an end with violence." Eventually, all price bubbles burst. In February 1637, the price of a tulip bulb rose so high that it could no longer find a sane buyer to sell it to. The buying frenzy immediately turned into a selling frenzy. Tulip bulb prices fell faster than they rose, and almost all option speculators were swept away because tulips fell below the option price and became worthless. The Dutch economy collapsed and people lost their money and their houses. Options trading also gained notoriety as a dangerous speculative tool, as many options speculators were swept out of the tulip mania.

This is also why you should only trade options with money you can afford to lose on speculative positions. Maximizing leverage by putting all your money into a single unhedged call or put option position for directional speculation is repeating the history of the tulip mania.

Japan's bubble economy collapsed in the 1990s

In the last story, we covered call options. In this story, we continue to introduce another important option product - put option.

Since the 1980s, the Japanese economy has experienced two extremes. In 1986, Japan's economy was stable, driven by industries such as automobiles, electronics, and integrated circuits, and its strength gradually increased. By the end of the 1980s, Japanese automobiles had dominated the world, and Japanese industries were blooming in Western Europe and Latin America. In the face of Japan's economic prosperity and skyrocketing stock market, the Japanese people were fascinated and invested in the stock market one after another.

In September 1985, international bankers finally stepped in. The "Plaza Accord" was signed at the Plaza Hotel in New York by the finance ministers of the United States, Britain, Japan, Germany and France. .

In October 1987, the New York stock market crashed. Baker put pressure on Japanese Prime Minister Nakasone to keep Japan lowering interest rates. Soon the yen interest rate fell to 2.5%, and a large amount of cheap capital flocked to the stock market and real estate. The annual growth rate of stocks in Tokyo was as high as 40%, and the real estate even exceeded 90%.

At this time, the Tokyo stock market had risen by 300% within three years, and the total value of real estate in an area of Tokyo was calculated in US dollars, exceeding the total value of real estate in the United States at that time. A huge financial bubble started to take shape. At this time, the first Nikkei put warrant was listed on the American stock exchange, underwritten by Goldman Sachs, and the issuer was the Kingdom of Denmark (Goldman Sachs was a private partnership at the time and had no SEC registration qualifications). A put warrant (which is essentially the same as a put option) gives the holder a certain right, but not an obligation, to sell the underlying asset at a predetermined price at a predetermined time. Americans use a lot of cash to buy. The Japanese think that the possibility of the Japanese stock market crashing is impossible. The two sides are betting on the direction of the Nikkei index. If the index falls, the Americans make money and the Japanese lose money. If the index rises, the situation is just right in turn.

At the end of 1989, the Japanese stock market reached its historical peak, and the Nikkei index reached 38,915 points. A large number of stock index short-selling options finally began to show their power. The stock index options bought by Goldman Sachs from the Japanese insurance industry were resold to the Kingdom of Denmark, and the Kingdom of Denmark sold them to the purchasers of the warrants and promised to pay the proceeds to the owners of the "Nikkei Index Put Warrants" when the Nikkei Index fell. By.

The warrants were immediately sold in the United States, and a large number of American investment banks followed suit, and the Japanese stock market could no longer hold back. The unstoppable slump hit people like an unexpected storm. The dream of becoming rich overnight turned into an abyss of nightmare, and panic shrouded the hearts of investors. By April 2003, it fell to 7,607 points at its lowest point, with a cumulative drop of 63.24%.

Call and Put Options

Let's first summarize the concepts of call options and put options:
A call option refers to the right of the holder of the agreement to purchase the underlying asset at a specified price and quantity within the validity period specified in the agreement.

A put option refers to the right of the agreement holder to sell the underlying asset at a specified price and quantity within the validity period specified in the agreement.

Both calls and puts fall under the category of derivative investing, meaning that their price movement is based on the price movement of another financial asset, often referred to as the underlying asset. same:
A trader buys a call option if they expect the price of the underlying to rise within a certain period of time.

A put option is bought if the trader expects the price of the underlying to fall within a certain period of time.

call option decomposition

For American options, a call option is an options contract that gives the buyer the right to buy the underlying asset at a set price at any time before the expiration date. The buyer of a European option can only exercise the option to purchase the underlying on the expiration date.

strike price

The strike price is the predetermined price at which the call option buyer can purchase the underlying asset. For example, a buyer of a call option launched by OKEx with an option strike price of $2,000 can use the option to buy at $2,000 before the option expires.

Options have different expiration times and can be short-term or long-term. Only if the current price of the underlying is higher than the strike price would it be worthwhile for the call buyer to exercise the option and ask the put writer to sell at the strike price. For example, if Bitcoin is trading at $9,000 in the market, it would not be worthwhile for a call option buyer to exercise their option to buy Bitcoin at $10,000 because they can buy spot at a lower price in the market.

what call option buyers get

In the above example, the caller has the right to buy Bitcoin at the strike price within a certain period of time. For this, the call option buyer pays a premium. If the underlying price is higher than the strike price, the option will be worth money (has intrinsic value). The buyer can either sell the option for a profit (which most people call the buyer), or exercise it at expiration (receive Bitcoin).

what call option sellers get

Option to buy a house to collect premiums. Selling call options is a way to generate income. However, income from selling calls is limited to the premium, whereas call buyers have theoretically unlimited profit potential.

Calculating the cost of a call option

On OKEx, one call option contract actually represents 0.1 BTC. Call prices are usually quoted in 1 bitcoin (ie 10 options).

put option decomposition

For American options, a put is an options contract that grants the buyer the right to sell the underlying asset at a set price any time before the expiration date. The buyer of a European option can only exercise the option (sell the underlying) on the expiration date.

strike price

The strike price is the predetermined price at which the put option buyer can sell the underlying asset. For example, a buyer of a Bitcoin put option with a strike price of $2,000 could use the option to sell at $2,000 before the option expires.

Only if the current price of the underlying is lower than the strike price, the call buyer can exercise the option and ask the put seller to buy the underlying asset at the strike price, which is worthwhile. For example, if Bitcoin is trading at $9,000 in the spot market, a put option buyer should not exercise their option to sell at $2,000 because they can sell it at a higher price in the spot market.

what put option buyers get

The put option buyer has the right to sell the underlying asset at the strike price within a certain period of time. For this, the put buyer pays a premium. If the underlying price is lower than the strike price, the option will be worth money. The buyer can either sell the option for a profit or exercise it (sell the underlying asset) at expiration.

what put option sellers get

The put seller receives a premium. Selling put options is a way to generate income. However, income from selling puts is limited to the premium, whereas the greatest profit potential for put buyers occurs if the underlying asset price is zero.

Calculate the cost of a put option

On OKEx, a put option contract actually represents 0.1 BTC, and the subscription price is usually quoted in 1 BTC (that is, 10 options).

"Greeks" is a term used in the options market to describe different dimensions of risk involved in taking an option position in a particular option or combination of options. These variables are called Greek letters because they are often associated with Greek symbols. Each risk variable is the result of an incomplete assumption, or relationship between the option and another underlying variable. Traders use different greek values such as delta, theta, etc. to assess option risk and manage option portfolios.

implied volatility

δ

Implied volatility is the volatility value derived by substituting the warrant transaction price in the market into the theoretical warrant price model. An underlying volatility represents the volatility and uncertainty of the asset. Rather than saying that the implied volatility determines the price of an option, it is better to say that the price of an option in the market reflects the market's volatility expectations for the target through the volatility.

δ(Δ) represents the rate of change between the price of the option and the price of $1 of the underlying asset. In other words, the price sensitivity of an option relative to the underlying. Call options range from 0 to 1, while put options range from 0 to -1. For example, suppose an investor is long a call option with a delta of 0.50. Therefore, if the underlying stock increases by $1, the option's price will theoretically increase by 50 cents.

θ

For options traders, delta also represents the hedge ratio that creates a delta-neutral position. For example, if you buy a standard American call option with 0.40 delta, you will need to sell 40 shares of stock to fully hedge. The net delta of an options portfolio can also be used to obtain the portfolio hedge ratio.

θ represents the rate of change between the option price and time, or time sensitivity—sometimes referred to as an option's time decay. Indicates the amount by which the option price decreases as the time to expiration decreases, other things being equal. For example, suppose an investor is long an option with a value of -0.50. All else being equal, the price of the option will drop 50 cents per day. If three trading days have passed, the theoretical value of the option will drop by $1.50.

γ

When the option is profitable, increase it, and when the option is profitable, decrease it. Options that are close to expiration also have accelerated time decay. Both long calls and long puts are usually negative; short calls and short puts are positive. In contrast, financial instruments whose value does not erode through time, such as stocks, have zero value.

γ(Γ) represents the speed at which the Delta value changes. This is known as second order (second derivative) price sensitivity. Gamma represents the change in delta for every $1 movement in the underlying asset. For example, suppose an investor owns a call option on a hypothetical XYZ stock. The call option has a delta of 0.50 and a gamma of 0.10. Therefore, if stock XYZ increases or decreases by $1, the delta of the call option will increase or decrease by $0.10.

Gamma is used to determine how stable an option's delta is: A higher value of Gamma indicates that the delta may change dramatically with small changes in the underlying price. When the option is exactly equal to the strike price, the gamma is higher. Gamma generally decreases the farther away from expiration; options with longer maturities are less sensitive to delta changes. As the expiration time approaches, the gamma value usually becomes larger, because the price change has a greater impact on the gamma.

Vega

An options trader may choose to hedge not only the delta but also the gamma so that the delta-gamma remains neutral, meaning that the delta will remain close to zero as the underlying price moves.

Vega (V) represents the rate of change between the option value and the implied volatility of the underlying asset. This is the sensitivity of options to volatility. Vega represents the change in option price when the implied volatility changes by 1%. For example, an option with a Vega value of 0.10 indicates that if the implied volatility changes by 1%, the expected option value will change by 10 cents.

ρ

Since increased volatility means that the underlying instrument is more likely to experience extreme values, increased volatility will correspondingly increase the value of the option. Conversely, a reduction in volatility can negatively affect the value of an option. Vega is at the top of the price for at-the-money options, which have longer durations until expiration.

The following table briefly summarizes the positive and negative relationship of the Greeks value between option buyers and sellers: