How to play options with advanced strategies
How are US stock options and A-share options traded
I have introduced a lot of basic knowledge about options. This section mainly talks about how to trade Chinese and US stock options and A-share options in practice.
Options trading refers to the act of trading (trading) the right of both parties to buy or sell certain securities after a certain period of time according to the price agreed in the contract. Unlike ordinary securities transactions, the object of options trading is not the securities themselves, but the right to buy or give up trading of certain securities. By paying a certain premium to the option seller, the option buyer obtains the right to buy or sell the stock during the delivery period at the price agreed in the contract, including the right not to buy or not sell (if the price is unfavorable to the option buyer). In other words, after a certain period of time, when the stock price changes in favor of option buyers, they exercise the right to buy or sell, and when the stock price trend is unfavorable to them, they relinquish the right to buy or sell. Buyers of rights lost only a small amount of processing fees or royalties during this period, avoiding even greater losses. Options trading not only adapts to speculators' speculative activities, but also avoids and mitigates risks, so it is common in countries with better financial markets. For example, in the US market, large orders can often be used to predict stock trends. Sometimes the volume of options trading is large enough to affect the trend of stock prices.
There is a slight difference between US stocks and A-share options trading. If you want to trade options on US stocks, you only need to open a margin account and then apply for options trading to trade options. Generally speaking, in US stock brokerage firms, options trading is divided into four levels (different brokerage firms are different), and the higher the level of approval, the higher the authority to operate; since February 2005, the only products on the A-share market (up to March 2017) are SS50 ETF options. If you want to engage in A-share options trading, it is slightly more complicated. The first step is to open an independent options trading account with a brokerage firm, and then meet the following stringent conditions:
1. The total market value of securities held by investors at the depositary institution and the balance available in the fund account shall not be less than 500,000 yuan.
2. Investors are required to have 6 months of experience in securities lending or financial futures trading before opening an account.
3. You must pass the Shanghai Stock Exchange's Level 3 Options Test. The content is basic knowledge of options, full monitoring, no replacement for the exam, and you must pass with 80 points.
4. Investors should practice in simulated trading and be familiar with options transaction settlement rules before entering actual combat.
5. Different institutions describe risk tolerance standards differently. For example, Huatai Securities requires a risk assessment result of “high risk tolerance,” but they all require investors to have an appropriateness assessment score of 90 or higher.
6. That is, no bad records. Investors are required to have good credit to participate in options trading. Furthermore, situations where laws, regulations, rules and the firm's business rules prohibit or restrict them from engaging in options trading also make some industry insiders unrelated to options.
The first four conditions are mandatory, and the latter two can be satisfied by the average person. As can be seen, it is not easy for ordinary retail investors to trade A-share options.
Now that we've introduced the SSE 50 ETF, let's first talk about how to trade A-share SSE 50 ETF options. SSE 50 ETF options contract types include two types: subscription options and put options. A subscription option is also called a call option, and a put option is also called a put option.
SSE 50 ETF options are measured in sheets per lot, and each option contract corresponds to 10,000 “50ETF” fund shares. In other words, the share of investors' purchases and sales is calculated as “sheets.” On the market, the SSE 50 ETF options contract expires in the current month, next month, and the next two quarter months, for a total of 4 months.
Through an account, investors can use normal price limit orders, surplus market price transfer limit orders, full immediate market price cancellation orders, full immediate market price orders, and other types of entrustment stipulated in business rules to carry out types of transactions such as opening and closing positions, selling and closing positions, preparing to close positions, ready to close positions, ready to close positions, ready to close positions, and ready to close positions. The reporting unit is “Zhang”, and the minimum change price is 0.0001 yuan.
US stock options
Compared to A-shares, opening and trading US stocks is easier. Early applications only need to fill out some questionnaires and pass brokerage review before options trading can be carried out. US stock options are the subject of 100 securities in one contract. This is not the same as the A-share Shanghai Stock Exchange 50 ETF. Let's continue to take Apple stock as an example. Assuming that the current price of Apple stock is 130 yuan, different transactions can be carried out for the expected future trends of the stock. If you are bullish on Apple stocks, you can buy call options. For example, you can buy a call option with a one-month expiration price of 135 at a cost of 2 yuan. If Apple's stock price is greater than 137 when it expires, the call option is profitable. The profit from buying a call option is
Profit = price at maturity - exercise price 135 - royalty cost 2 blocks.
A call option holder has two options. One is to sell the call option directly on the market for direct profit, and the other is to exercise the right to buy Apple shares from the option seller's phone at the price of 135 as stipulated in the previous contract and sell it at the market price. The latter requires a certain amount of cash in the account to exercise the rights; otherwise, the position will be forcibly closed, that is, the options will be sold before the market closes. If you continue to be optimistic about the future market of Apple shares, you can hold shares. If the trend of Apple stock is bearish, you can buy Apple put options. For example, you can buy a put option with an exercise price of 125 which expires in one month. The cost is 2 yuan. If the price of Apple stock falls below 123 at maturity, the put option will be profitable. The profit from buying a put option is:
Profit = exercise price 135 - expiration date price - royalty cost 2 blocks
Put option holders have two options. One is to sell the call option directly on the market for direct profit, and the other is to exercise the right, buy Apple shares at market price on the market and then sell them to the put option seller at a contract price of 135 as stipulated in the contract.
Options are a zero-sum game; since there is a buyer, there will be a corresponding seller. If it is an in-price option, the seller of the option must exercise the obligations of the option seller after the expiration date. Like the sellers of call and put options described in the example above. The risk of an option buyer is manageable. The biggest loss is the premium to buy an option contract. The theoretical risk of a call option seller is unlimited because the rise in stock prices is unlimited; in theory, the biggest loss for put option sellers is the stock exercise price - premium. Investors generally do not recommend options seller operations. Unless you are familiar with the concept and definition of options, or use a combination of options, try not to sell options naked.
When trading at option prices, try to use limit orders. Many options have a large bid/ask price difference. If the price is listed, you will lose part of the premium during the transaction, which means you will need to pay more premium to buy an option.
Leverage and risk of options
Everyone knows from the above introduction. A US stock options contract is 100 shares, and an SSE 50 ETF is 10,000 fund shares. It can be said that the options themselves are naturally leveraged. However, the leverage of options is not simply 2 or 5 times; it changes as the exercise price is compared with the underlying market price. Assuming Apple (AAPL) opens at $130 on the maturity date, the two call options are exercised at $30 and $130, respectively. According to the option pricing theory, the value of an option with an exercise price of 30 is equivalent to Apple's stock price. The option trend should also be consistent with the stock price trend. There is no big difference between buying an option and buying a stock at this time; the leverage is about 1. An option with an exercise price of 130 US dollars opens at 1 US dollar. After that, if Apple's stock price rises 3.8% to 135 US dollars, the option price will rise to 5 US dollars, an increase of 400%, with a leverage ratio of 105 times; if the stock price rises 10% to 143 US dollars, the option price will rise to 13 US dollars, an increase of 1,200%, and the leverage ratio will increase 120 times.
From this, it can be seen that the option leverage “the more ITM options within the price, the smaller the leverage; the more off-price OTM options, the greater the leverage”. This shows the appeal of using options as small and large.
Second, there is the risk of options. Unlike the possibility of stocks going bankrupt and returning to zero, the possibility of options returning to zero is common. Call options and put options on the same subject bet in different directions. As long as the direction is wrong, the off-price option basically returns to 0 when it expires. In the Apple options example above, if an investor buys a put option with an exercise price of 130 US dollars, whether Apple shares rise to 131 US dollars or 150 US dollars, the options in their hands will become a piece of waste paper.