How to use advanced strategy to play options

Views 51k2023.08.09

What is an option?


Background: Xinhua News Agency, Shanghai, February 9, New Media Special report, the first market-oriented risk transfer tool in China's mainland stock market was unveiled on the Shanghai Stock Exchange on the 9th in a high profile, and the Shanghai 50ETF options contract was officially listed. This marks that stock options, a financial derivative tool, has officially entered China's capital market.

China's option market has great potential for development. Stock ETF option is a mature derivative tool in the international capital market, but it is a brand-new product in China. Its combination and application is very complex, which is not only a tool to manage risks, but also may cause new risks. It is a double-edged sword. How to make good use of this double-edged sword and play its unique role.

I first came into contact with options when I came to study in the United States in 2010. we have a course specializing in financial derivatives, including options, futures and other financial derivatives. I also have more than five years of experience in trading US stocks and options in 2011. I have also made more than 50 times the profit by taking long individual stock call options, and there are times when the loss on a single call option is more than double. There are also times when a stable annualized return of 20% can be achieved through the option strategy.

Individual investors generally magnify leverage through option buyers, and professional institutional investors generally make a steady profit as option sellers by collecting royalties. We have seen individual investors who have made nearly 30 times the return on options within two years. We also saw an annualized rate of return of more than 60%, and the size of assets increased from $3 billion to $6 billion in three years. In the past four years, we have also seen a lot of novice options traders suffer a lot of losses on options, and many people have lost their positions because of long options.

Some people earn hundreds of times the return through options, some people hedge the losses caused by the fall of stocks through options, and some people use options to carry out risk-free arbitrage. It is believed that many people have heard of options for the first time, and many people do not know what options are. How should the transaction be made? What's the difference between options and futures? What is the relationship and relationship between stocks and stocks? With so many option strategies, which one should be chosen to maximize profits?

Through a series of articles, we hope to start with the simplest basic concepts of options, to complex strategic combinations, and then to practical applications, hoping to help you understand what options are. Our series of articles on options are suitable for those who do not have any basic knowledge of options, as well as those who have some basic knowledge but can not flexibly use options for hedging and arbitrage. It is more suitable for traders who want to make a stable profit through options.

If we want to understand what options are, we have to start with the history of options. Option trading first began in the United States and Europe in the late 18th century. Until the establishment of the Chicago Board of options Exchange (CBOE) on April 26th, 1973, there were more than 2500 stocks and more than 60 stock indexes in all exchanges in the United States.

In January 1983, the Chicago Mercantile Exchange proposed S&P500 stock index options, and the New York Futures Exchange also launched the New York Stock Exchange stock index futures options trading. At present, the options exchange has spread all over the world, among which the Chicago options Exchange (CBOE) is the largest option exchange in the world.

To put it simplyOption (Option)An option is the right to buy or sell a certain number of specific stocks or commodities at a specific price at a specific time in the future. The holder of the option can choose to buy or not to buy, sell or not to sell within the time specified in the option, he can exercise the right or waive the right, while the seller of the option only has the obligation under the option contract.


Why are we writing this article about options? The reason is simple: options are widely used in the world financial market. An important feature of the American market is that options can be traded. Option trading was also launched in China at the beginning of 2015. At present, only Shanghai 50ETF options are available.

Although option investment takes some time to fully master, it would be a pity to miss it because you don't understand it. After all, option is a powerful investment tool that can bring many benefits to investors. Options are powerful tools for investors to invest, arbitrage, risk management and even speculation. here are a few of the benefits and functions of options:

1. Options can provide leverage and improve the efficiency of the use of funds

Providing leverage is an important reason for options to attract investors, investors only need to pay a small amount of royalties, they can bet on the gains brought by the price changes of the underlying assets, but at the same time the risk will be magnified.

At the end of 2012, the quantum fund of financial tycoon Soros used about $30 million and bought a large number of foreign exchange options with an exercise price of 90-95, making a profit of US $1 billion, equivalent to a more than 30-fold increase in capital, reflecting the leverage of the options. at the same time, the risk is also quite high, which requires very high judgment on the direction of investors.

To take another example, for example, the current price of Apple Inc's stock is 118,120 corresponding to the exercise price, and the price of the call option one week after the expiration date is 1.47. suppose the price of Apple Inc's stock rises to 130 a week later, which is more than fivefold compared to the profit return of options trading: (10-1.47) / 1.475,533%.

The leverage ratio of options can also be adjusted by buying and selling options of different prices, for example, if you want to use a lower leverage ratio, you can buy options within the deep price (In the money), and if you want a higher leverage ratio, you can buy out-of-price options (Out of the money).

two。 Hedging market risk

Many investors like to hold some stocks in the long term, but fear that the stock price will fall, so they can buy put options (Put) to hedge against the downside of the market. For example, investors hold 1000 shares of Apple Inc Company with a share price of RMB1180.They buy 10 put options with an exercise price of RMB115m with a royalty of RMB1.50per share to hedge against the loss caused by the fall in the share price.

If the stock price falls to 100 yuan on the maturity date, the profit of the option position (15-1.5) * 10 million 100 yuan 13,500 yuan offsets the loss of some of the underlying stocks by 18000, reducing the loss from 15.2% to 3.8%. This strategy is also known as protective put strategy protective put.

3. Lock in profit

If the investor holds the underlying stock and has accumulated a certain profit, if he is uncertain about the future and worried about the fall of the stock price, but the selling stock is worried that the stock price will continue to rise and lose the opportunity to get a higher return, at this time, the investor has two measures:

(1) if investors need to cash in their shares, they can sell the shares and buy par options at the same time.

(2) if the position is large and the impact cost of selling stock is high, you can buy put options from the stocks of the opponent to lock in the profit.

4. Increase revenue

Although put options and put options are high-risk strategies, put options can increase income under certain circumstances. For example, in the case of holding the underlying stock, if the stock price is consolidated at a high level, and investors' views on the future trend of the underlying stock are neutral or slightly bullish, and they are willing to reduce their holdings when the stock price rises to a certain level, they can sell call options to increase returns. This strategy is also known as the guaranteed call option covered call.

5. Buy the target stock at a price below the market price

Investors want to buy stocks, but think that the current stock price is high, and if they want to wait for the stock price to fall to their desired low, they can sell put options whose put price is near the target buying price. Take Apple Inc's stock as an example, the current price is 118. if Apple Inc's price falls below 115, investors are willing to buy it. If the investor sells the put that expires after a month, the exercise price is 115, you can get 1 yuan of royalty.

If the stock price at maturity is higher than the exercise price, the option becomes void and the option seller gets the royalty; assuming that the valuation at maturity is lower than the exercise price of 115, the option seller will obtain the stock from the option buyer at the price of 115. coupled with the previous sale of the right fee of 1 yuan, the average cost of buying Apple Inc stock is only 114.

6. Minimize risk

For the option buyer, the option provides a limited risk, that is, limiting the maximum loss, that is, the royalty paid for the purchase of the option. Suppose Apple Inc shares 118, buy 100 shares, the total expenditure of 11800 yuan, suppose Apple Inc company bankruptcy, will lose 11800 yuan.

If we use a call option instead of holding a positive stock, assuming that the call option expires in a month and the exercise price is 120 yuan, we buy one hand, which is equivalent to 100 shares. When the stock rises, we will enjoy the gains brought by the stock rise when we hold the call options. even if Apple Inc goes bankrupt, our biggest loss is the royalty of 100 yuan paid for buying the call option.

7. Options can create a profitable portfolio in any market condition.

For investors who simply buy and sell stocks, they usually have a profit opportunity only when the stock goes up or down. And direct short selling of stocks may face unlimited risks, which makes the profit path of stock investors can only rely on the rise of stock prices. In the face of market conditions such as consolidation or two-way large fluctuations, what stock investors can do is to wait and see.

With the help of options, no matter whether the stock rises, falls, does not go up or down, two-way huge fluctuations and so on, the corresponding option portfolio can be constructed, so that investors can have the opportunity to make a profit under any market conditions. what is really needed at this time is investors' judgment of market conditions.

After preparing for a long time, we intend to launch a series of articles on option strategy and practical application. I hope you can have a very in-depth understanding of options.

This series of articles begins with a brief introduction to the importance of options. Skillful operation of options can change you from passive to active in the face of changing markets. You can better grasp the direction in the volatile market to magnify the earnings, and protect your position from the extreme influence through the option portfolio in the case of extreme implied volatility. In markets with uncertain directions (such as now), you can actively earn interest money through various operations to obtain stable income.

And skillful mastery of options allows you to stay on the winning side of the game, rather than passively waiting for the market to create opportunities.

We will try our best to cover the basic concepts of options, the advantages and disadvantages of various brokerages on option operations and their comparison, Greeks, the theoretical and practical significance of implied / historical volatility, basic subject matter and option combination strategies, various combinations (Vertical, Butterfly, Calendar, Back, Ratio,Collar, Iron condor), and so on. We will also explain actual combat ideas in many cases according to examples.

I hope that after reading our article, you can have a basic understanding of the concept of options, and be able to skillfully use options as a financial derivative to better serve your investment strategy. finally, we hope that you can realize wealth freedom as soon as possible. Investment is a matter of a lifetime, and we hope to accompany you on the road of investment.

Where can I watch the course?


Or check it in [bullpen]-[classroom], the course is constantly updated! Cattle friends, please look forward to it.


The author introduces:

Li Gong, Chief Investment Officer of Paretone Capital, Prior Capital. Before joining Paretone Capital, he worked for a well-known hedge fund on Wall Street. He was good at designing, developing and perfecting quantitative trading system, portfolio optimization system and investment strategy evaluation system. The research and development in the long-term experience of hedge fund quantitative analysts is based on momentum, volatility, derivatives Greeks value, combined with big data analysis of the trading system model annual return of more than 60%, responsible for the fund quantitative model development, back testing, and actual implementation. Master's degree in quantitative Finance from the University of Southern California. Senior US stocks, A shares and options refer to investors.

Wang Wei, CFA, founder of Paretone Capital. Hold the position of senior manager in an investment bank, responsible for the financial due diligence of mergers and acquisitions. He has worked for Huamei Bank, a Nasdaq-listed bank, as a management trainee, analyst and portfolio manager Portfolio Officer, with total assets of more than US $33 billion. Mainly responsible for bond financing of high-tech and biomedical companies, while providing leveraged buyout debt financing for private equity and listed companies, participating in debt financing of more than $1 billion. At the same time, he is responsible for the operation of the family office fund, participates in five venture capital funds in the United States and Canada, and directly participates in more than 50 projects. He has worked as an analyst at Clean Energy Capital, a private equity firm, mainly responsible for valuing invested and invested companies, as well as industry analysis and investment due diligence. The company has assets under management of 200 million US dollars. Engaged in A-share and US stock trading for more than ten years, studied options more thoroughly, and used option strategy to obtain excess returns. Bachelor degree in Accounting, Renmin University, graduate student in Finance Department, University of Arizona, Chartered Financial analyst.

One-stop trading with Futubull

Enjoy welcome rewards and lifetime 0 commission on HK stocks

Terms and conditions apply right-arrow
Disclaimer: The above content does not constitute any act of financial product marketing, investment offer, or financial advice. Before making any investment decision, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors where necessary.