My investment motto: Investing is for a better life.
Many people have told me that options are difficult to understand and have all kinds of complicated nouns. In fact, an option is a simple agreement, and all terms are paper tigers. Let me give you an example and everyone will understand.
There are now two investors, A and B.
A said: I am very optimistic about this ETF. I think it will rise from the current 1 yuan to more than 1.2 yuan in the next month. Let's make a deal. I'll give you a deposit of 100 yuan. If I ask you for it one month later, you must prepare 10,000 shares of ETF and sell it to me at a price of 1.2 yuan. Of course, I may not make a request to you. It is up to me to decide whether to make a request or not. Regardless of whether I ask for it or not, this 100 yuan is yours.
In addition, in order to ensure that you fulfill your rights when the time comes, you must pay a deposit, not much, 1,000 yuan.
B said: OK, I accept your agreement.
This is an agreement between the buyer and seller of an option. Doesn’t it look simple? Indeed.
In the example, A believes that the ETF will rise, and its contract is called "buy and call"; and B is its counterparty, and its contract is called "sell and call." A proposes to B a price of 1.2 yuan, which is called "exercise". The power to propose or not to exercise the power lies in the hands of A.
One month has passed quickly. Below, we analyze the behavior of A and B based on the different prices of ETFs after expiration.
Scenario 1: After expiration, the ETF falls to 0.5 yuan
At this time, will A propose to B to buy the ETF at a price of 1.2 yuan? Definitely not, because according to the market price, ETF only costs 0.5 yuan, so why should you pay a high price to buy it?
In this case:
A lost 100 yuan;
B earned 100 yuan. Considering that B paid a deposit of 1,000 yuan when making this transaction, B made 10% this month, and the annualized income reached 120%!
Scenario 2: After expiration, the ETF rises to 1.5 yuan
At this time, will A propose to B to buy the ETF at a price of 1.2 yuan? Definitely, because according to the market price, the ETF costs 1.5 yuan. A only needs to spend 1.2 yuan to buy 10,000 ETF shares from B, and then sell them to the market for 1.5 yuan, making a profit of 3,000 yuan in one transaction!
In this case:
A: The contract cost 100 yuan and earned 3,000 yuan. After deducting the cost of 100 yuan, the rate of return is 2900%! Earned a full 29 times!
B: Need to buy 10,000 shares of ETF from the market at 1.5 yuan/share, and then sell them to B at 1.2 yuan, resulting in a loss of 3,000 yuan; fortunately, he received a 100 yuan premium from A, resulting in a total loss of 2,900 yuan.
As can be seen from the above two examples:
1. The buyer and seller of options are opponents of each other;
2. The buyer has the right to exercise the option, and the maximum loss is the royalty, so the loss is limited but the profit is unlimited; the seller has no right to exercise the option, the maximum profit is the royalty, the profit is limited but the loss is unlimited.
