What are the trading rules and operating methods of options? An option is the right to buy or sell an underlying asset. An option contract can buy or sell a certain amount of the underlying asset at a specific price at a specific time in the future.
In options trading, the buyer has to pay a certain fee, that is, a premium, to obtain the option, and the seller is responsible for collecting the premium. Options are divided into call options and put options, also called call options and put options. The buyer can decide whether to exercise the option. The purpose of options trading is for speculation, arbitrage and risk management.
What are the trading rules for options?
1. Contract elements
Underlying assets: stocks, indices, commodities, foreign exchange, etc.
Type: Call or Put.
Strike Price: The agreed purchase and sale price.
Expiration date: the last date of option validity (American-style options can be exercised in advance, European-style options can only be exercised on the expiration date).
2. Trading mechanism
Exchange and trading hours: Trading hours are generally synchronized with the underlying asset market.
Margin system: The seller is required to pay a deposit (to prevent breach of contract), and the buyer only pays the premium (the maximum loss is the premium).
Liquidity: Choose contracts with high trading volume to avoid "slippage" (a large difference between the transaction price and the expected price).
3. Exercise and delivery
Exercise method: American style (exercise at any time) vs. European style (only on expiry date).
Delivery type: physical delivery (such as stocks) or cash settlement (such as index options settled at a spread).
How do options work?
Buying call options: Used when the price of the underlying asset is expected to rise. By paying the premium, you get the right to buy the underlying asset at the exercise price within the specified time. If the price of the underlying asset is higher than the sum of the exercise price and the premium at expiration, you will make a profit; otherwise, you will lose the premium.
Selling call options: Operate when the price of the underlying asset is expected to be stable or fall. Receive a premium, but have the obligation to sell the underlying asset at the exercise price when the option is exercised, with limited returns and unlimited risks.
Buying a put option: Selected when the price of the underlying asset is expected to fall. After paying the premium, you have the right to sell the underlying asset at the exercise price when it expires. When the price of the underlying asset drops by more than the premium, you will make a profit. The maximum loss is the premium.
Selling a put option: It is done when you believe that the price of the underlying asset will not fall significantly. The premium is collected. If the option is exercised, the underlying asset must be purchased at the exercise price, with limited returns and risks.
In other words, there are four single-leg strategies for options trading: buying call options, selling call options, buying put options, and selling put options, which are respectively suitable for situations where the market is expected to rise significantly, the market is not expected to rise, the market is expected to fall significantly, and the market is not expected to fall.
When buying a call (put) option, the higher (lower) the exercise price, that is, the higher the degree of out-of-value, which means the expected increase (fall) will be greater. When selling call (put) options, the higher (lower) the exercise price, the higher the degree of out-of-value, and the lower the risk.
For buying opening positions, the profit and loss amount of selling closing positions is equal to (selling closing transaction price minus buying opening transaction price) multiplied by the contract unit;
For selling (covered) opening, the profit and loss amount of buying (covered) closing is equal to (sell (covered) opening transaction price minus buying (covered) closing transaction price) multiplied by the contract unit.
How does option trading work?
Select an option contract: Select an appropriate contract based on investment objectives, risk tolerance, market conditions, etc., including determining the underlying asset, option type, expiration date, and exercise price.
Order trading: Place an order through the trading platform, trading mode T+0, specify relevant parameters when placing an order.
Monitor positions: Pay close attention to market conditions and positions, adjust strategies in a timely manner, and pay attention to factors such as changes in underlying asset prices.
Exercise or liquidate: You can choose to exercise or close the position before expiration. The underlying asset will be purchased and sold according to the exercise price. The liquidation will end the position by buying and selling the contract in the market. The exercise is usually on the expiration date (European style).
Settlement and fund transfer: After expiration or liquidation, the exchange settles, and investors transfer funds according to the results.
Things to note
Seller's risk: Selling options may face unlimited losses.
Time value decay: The decrease in option value as time passes, especially as expiration approaches.
Impact of Implied Volatility: Rising volatility pushes up option prices, so you need to pay attention to market events.
What do options mean?
An option is a contract that gives the buyer of the contract the right to buy or sell a certain amount of a specific asset from the seller of the contract at a pre-agreed price (exercise price) on or before a specific date (expiration date), but the buyer does not assume the obligation to perform the contract.
Components
Underlying asset: that is, the asset corresponding to the option contract, which can be stocks, bonds, futures contracts, foreign exchange, commodities, etc. For example, the underlying asset of the SSE 50 ETF option is the SSE 50 traded open-end index securities investment fund.
Premium: It is the fee paid by the option buyer to the option seller to obtain the option rights, and is the price of the option. It is similar to the premium paid for buying insurance. This fee is usually non-refundable regardless of whether the rights are exercised.
Exercise price: Also called the exercise price, it is the price at which the underlying asset is bought and sold when the buyer exercises his rights as stipulated in the option contract.
Expiration date: It is the last effective date specified in the option contract. After this date, the option becomes invalid.
Finally, the above opinions are for reference only and should not be used as a basis for trading. You are responsible for your profits and losses. The market is risky and investment needs to be cautious.
