Options Q&A

    IoptionWhat is the historical development of China?
    The earliest record of option trading is the agreement on contract system in the Bible's Genesis. Around BC1700In, Jacob signed an agreement to work for Laban for seven years in order to obtain permission to marry Rachel, Laban's daughter. Here, Jacob7The remuneration for annual labor is the "royalty", which is used to obtain the "right" to marry, rather than the obligation.
    Regarding the historical development of options, it is necessary to mention "tulip options". As early as17Centenary30In the late 1990s, Dutch wholesalers had already learned to manage the risks of tulip trading through options. At that time, tulips were a symbol of status and were sought after by Dutch nobles, with wholesalers generally selling tulips for forward delivery. Due to the inability to determine the cost price of purchasing tulips from growers in advance, wholesalers need to bear significant risks, hence the emergence of tulip options.
    Wholesalers lock in the highest future purchase price of tulips at the time of contract signing by purchasing call options from growers. When the acquisition season comes, if the market price of tulips is lower than the price specified in the contract, the wholesaler can give up the option and choose to buy tulips at a lower market value, only losing the premium (the cost paid for purchasing the option); If the market price of tulips is higher than the price specified in the contract, the wholesaler has the right to buy tulips from the grower at the agreed price, and controls the maximum price for buying tulips. This is the earliest commodity option.
    stay18In the th century, options were introduced into the financial market. In the early days, stock option trading with stocks in the spot market as trading objects was relatively dispersed and belonged to over-the-counter (off exchange) trading.1973In, the Chicago Board Options Exchange, the world's first standardized stock options trading place, was approved by the U.S. Securities and Exchange Commission（SEC）Approved for establishment, while also introducing standardized stock option contracts (call options).
    2、 Do overseas exchanges also have trading of individual stock options?
    In overseas markets, compared to the over-the-counter market, individual stock options traded on exchanges are the earliest standardized equity derivative products listed on exchanges, and with standardized trading rules and regulatory systems as safeguards, they are more accepted by general investors.
    1973Chicago Board Options Exchange（Chicago Board Options Exchange,abbreviationCBOE）Established, launched16Call options for only the underlying stocks; thereafter,CBOEWe spare no effort in developing stock option business to meet the needs of investors. For example, in the1990Launched long-term options inLEAPS，1992Annual regional and international launchstock market indexOptions,2004yearVIXindexfuturesStart trading,2005In, short-term options with a maturity of one week were launched,2008Annual launchSPDRgoldTrust options, etc. Currently, onCBOEThe stock options listed for trading are approximately1896Species,28Index options,96speciesETFOptions and4Interest rate options with daily average trading volume reaching290More than 10000 contracts.
    1974In, the US Stock Exchange launched stock option trading;
    1977In, the United States Securities and Exchange Commission approved the trading of stock put options on relevant exchanges;
    1978In, the London Stock Exchange and the Dutch European Options Exchange began to carry out stock options business;
    1982In, the New York Stock Exchange, Toronto Stock Exchange, and Montreal Stock Exchange began trading stock options;
    stay20century80After the s, the stock option trading market rapidly developed globally. The United Stock Exchange of Hong Kong (now the Hong Kong Stock Exchange)1995The first HSBC Holdings option was launched in, becoming the first market in Asia to provide individual stock option trading for investors. 2002year1In January, the Korean Stock Exchange began trading stock options. The first batch of transaction targets7The only securities are Samsung ElectronicsSK TelecomKorea Communications, Korea Electric, POSCO Steel, National Bank, and Hyundai Motor. As of now, South Korea has become the most active stock option market in the world, with the Korean Stock Exchange2011The annual trading volume of futures and options contracts is39.27Billion sheets.
    3、 What is a stock option?
    An option is a contract between two trading parties regarding future buying and selling rights. In the case of individual stock options, the buyer (right holder) of the option obtains a right by paying a certain fee (premium) to the seller (obligation holder), that is, the right to buy or sell a specified number of stocks from the option seller at the agreed time and price, orETF。 Of course, the buyer (right holder) can also choose to waive the exercise of rights. If the buyer decides to exercise their rights, the seller has an obligation to cooperate.
    4、 What are the types of individual stock options?
    According to different standards, individual stock options are divided into many types. Below, we will introduce the following classifications.
    1Divided by the rights of option buyers into call options and put options
    Call option refers to the right of the buyer (right holder) of the option to purchase a certain amount of underlying assets from the seller (obligation holder) at the agreed time and price, and the buyer has a call option.
    Put option refers to the right of the buyer (right holder) of the option to sell a certain amount of underlying assets to the seller (obligation holder) of the option at the agreed time and price, and the buyer has a put option.
    For example, Mr. Wang bought a stock at an exercise price of15When the contract expires, no matter what the market price of the stock is, Mr. Wang can15Purchase the corresponding quantity of the stock at a price of yuan per share. Of course, if the market price of the stock falls to15If the price is less than yuan per share, Mr. Wang can waive the exercise and lose the paid premium.
    2Divided by the time limit for option buyers to exercise options, it is divided into European options and American options
    European options refer to options that can only be exercised by the buyer on the expiration date of the option.
    American options refer to options that can be exercised by the buyer on the trading day or expiration date prior to the expiration of the option.
    American and European options are divided based on the exercise time. Compared to European options, American options are more flexible and give buyers more choices.
    3Divided by the relationship between the exercise price and the market price of the underlying securities, it can be divided into real value options, flat value options, and imaginary value options
    Real options, also known as in the money options, refer to the condition that the exercise price of a call option is lower than the market price of the underlying securities, or the exercise price of a put option is higher than the market price of the underlying securities.
    A flat option, also known as a flat option, is a state in which the exercise price of an option is equal to the market price of the underlying security.
    False value option, also known as out of the money option, refers to the condition that the exercise price of a call option is higher than the market price of the underlying securities, or the exercise price of a put option is lower than the market price of the underlying securities.
    For example, for an exercise price of15When the market price of the stock is20When yuan, the option is a real value option; If the market price of the stock is10Yuan, then the option is a phantom option; If the stock price is15Yuan, then the option is a flat value option.
    5、 What is the difference between individual stock options and futures contracts?
    Futures contract refers to a standardized contract established by a futures exchange that stipulates the delivery of a certain quantity and quality of subject matter at a specific time and location in the future.
    The differences between individual stock options and futures contracts are as follows:
    1The rights and obligations of the parties are different:
    The individual stock option contract is an asymmetric contract, where the buyer of the option only has rights and does not assume obligations, while the seller only assumes obligations and does not have rights; The rights and obligations of both parties to a futures contract are equal, which means that at the expiration of the contract, the holder must buy or sell the subject matter at the agreed price (or settle in cash).
    2Different return risks:
    In option trading, investors' risks and returns are asymmetric. Specifically, the option buyer bears limited risk (i.e. the risk of losing the premium) and the profit may be unlimited, while the option seller enjoys limited income (limited to the premium obtained) and its potential risk may be unlimited; The profit and loss risks borne by both parties to a futures contract are symmetrical.
    3Different deposit systems:
    In individual stock option trading, the option seller should pay a margin, while the option buyer does not need to pay a margin; In futures trading, whether long or short, the holder needs to use a certain margin as collateral.
    4Balancing Hedging and Profitability:
    In the hedging operation of investors using individual stock options, while locking in management risks, there is also room for further profitability. That is, when the underlying stock price moves in an unfavorable direction, it can timely lock in risks, and when it moves in a favorable direction, it can also obtain profits; In hedging operations using futures contracts, investors not only avoid adverse risks but also give up the possibility of income changes and growth.
    6、 What are the differences between individual stock options and warrants?
    Warrants are securities issued by the issuer of the target securities or a third party outside of them, and the holder of the agreement has the right to purchase or sell the underlying securities from the issuer at the agreed price within a specified period or specific maturity date, or to collect settlement differences through cash settlement.
    The differences between individual stock options and warrants are:
    1Different properties:
    Individual stock options are standardized contracts designed by exchanges; Warrants are non-standard contracts that are determined by the issuer as contract elements. In addition to being independently created by listed companies and securities companies, they can also be issued together as part of separable bonds.
    2Different issuing entities:
    There is no issuer for individual stock options, and each market participant can be the seller of the option with sufficient margin; The main issuing entities of warrants are third parties such as listed companies, securities companies, or major shareholders.
    3Different types of positions:
    In individual stock option trading, investors can either open positions to buy options or open positions to sell options; For warrants, investors can only buy them.
    4Different performance guarantees: The selling and opening party of an option transaction needs to pay a margin due to their obligation (the amount of the margin varies with the market value of the underlying securities); In warrant trading, the issuer guarantees performance with its assets or credit.
    5Different effects after exercise:
    The exercise of call or put options only involves the transfer of assets between different investors and does not affect the actual total circulating share capital of the listed company; For warrants created by listed companies, when the subscription warrants are exercised, the issuing company must issue new shares in accordance with the number of shares specified in the subscription warrants. This means that for each execution of the subscription warrants, the actual total outstanding share capital of the company will increase.
    7、 What are the basic elements of individual stock options?
    Individual stock option contracts typically include the following basic elements:
    1Contract type: divided into call options and put options.
    2Contract subject: The subject of an individual stock option contract is a single stock listed and traded on an exchange, orETF。
    3Contract Expiration Date: The date on which the contract expires and is also the last date on which the option buyer can exercise their rights. After the contract expires, it automatically expires, and the option buyer no longer has rights and the option seller no longer assumes obligations.
    4Exercise price: The exercise price, also known as the strike price or strike price, is the price at which a buyer of a stock option buys or sells the subject matter of the contract.
    5Contract unit: refers to the number of contract subjects corresponding to an individual stock option contract.
    The trading amount of an individual stock option contract=premium × Contract unit
    6Exercise price spacing: refers to the difference between the exercise prices of adjacent stock options, usually set in advance.
    7Delivery method: divided into physical delivery and cash delivery.
    Physical delivery refers to the payment of cash by the right party of the call option to purchase the underlying asset after the expiration of the option contract, the revenue from the obligation party of the call option to sell the underlying asset in cash, or the revenue from the right party of the put option to sell the underlying asset in cash, and the obligation party of the put option to buy the underlying asset and pay in cash.
    Cash delivery refers to the payment of the price difference between the buyer and seller of an option in cash based on the settlement price, without involving the transfer of the underlying asset.
    8、 What are the premium, intrinsic value and time value of individual stock options?
    The premium of individual stock option refers to the market price of the option contract. The option holder pays the premium to the option obligor in order to obtain the rights granted by the option contract.
    Royalty consists of intrinsic value (also called connotative value) and time value. The intrinsic value of an option is determined by the relationship between the exercise price of the option contract and the market price of the option target, which means that the option buyer can buy or sell the proceeds of the underlying securities under conditions that are better than the existing market price. Intrinsic value can only be positive or zero. Only real options have intrinsic value, and flat options and dummy options do not have intrinsic value. The intrinsic value of a real call option is equal to the current underlying stock price minus the option exercise price, and the exercise price of a real put option is equal to the option exercise price minus the underlying stock price.
    Time value refers to the amount that the buyer of the option is willing to pay to buy the option during the option appreciation period due to the change of the price of the relevant contract object over time. It is the part of the option premium that exceeds the intrinsic value. The longer the validity period of an option, the greater the likelihood of profit for the buyer of the option; For the seller of an option, the more risks they must bear, the more premium they require to sell the option, and the buyer is willing to pay more premium to have more profit opportunities. So, generally speaking, the longer the remaining effective time of an option, the greater its time value.
    9、 What are the factors that affect the price changes of individual stock options?
    1Current price of contract subject matter:
    When other variables are the same, if the price of the contract subject increases, the call option price increases, while the put option price decreases; If the price of the contract subject decreases, the call option price decreases, while the put option price increases.
    2Exercise price of individual stock options:
    For call options, the higher the exercise price, the lower the option price; For put options, the higher the exercise price, the higher the option price.
    3Remaining maturity time of individual stock options:
    For options, time is equivalent to the opportunity to make a profit. Under the same other variables, options with longer remaining maturity have higher value to the option buyer and greater risk to the option seller, so their prices should also be higher.
    4Current risk-free interest rate:
    Under the same other variables, the higher the interest rate, the higher the price of the call option and the lower the price of the put option; The lower the interest rate, the lower the price of the call option, and the higher the price of the put option. The magnitude of the impact of changes in interest rates on option prices is positively correlated with the length of remaining time of option expiration.
    5Expected volatility of contract subject matter:
    Volatility is an indicator of the severity of changes in securities prices. Under the same other variables, individual stock options with higher volatility of the contract subject matter have higher prices.
    6Dividend rate:
    If the exercise price of the underlying stock is not adjusted accordingly when dividends are distributed, the dividend distribution of the underlying stock will lead to changes in the option price. Specifically, an increase in the dividend distribution of the underlying stock will lead to a decrease in the price of call options and an increase in the price of put options; The decrease in dividend distribution of the underlying stock will lead to an increase in the price of call options and a decrease in the price of put options. In addition, the longer the remaining maturity time of an option, or the greater the expected number and frequency of dividends, the greater the impact of dividends on its price.
    10、 Why do options have value?
    It is not difficult to understand that options give the holder the right to buy or sell the subject matter at the agreed price at the agreed time, allowing the holder to obtain a certain expected return through exercise. Therefore, the holder needs to pay a certain amount to obtain this right.
    Specifically, the value of individual stock options can be understood from two perspectives: intrinsic value and time value. Its intrinsic value means that the option holder can buy or sell the underlying stock at a price better than the existing market price at the agreed time, which can only be positive or zero. Accordingly, only real options have intrinsic value, and flat options and phantom options do not have intrinsic value.
    The time value of an option represents the possibility that changes in the underlying stock price will benefit the option holder during the remaining validity period of the option. The closer an option is to its expiration date, the less likely it is that the price of the underlying stock will change in favor of the option holder. Therefore, it can be understood that the time value is lower until it disappears to zero at maturity.
    11、 What can individual stock options bring to investors?
    Options have various functions such as transferring risk, meeting the needs of investors with different risk preferences, discovering prices, and enhancing the logistics mobility of the underlying assets. Taking individual stock options as an example, the uses of options for investors mainly include the following five aspects:
    1To provide insurance for the underlying assets held, when investors hold spot stocks and have already made a book profit, but are not optimistic about future market expectations and want to avoid the risk of losses caused by stock price drops, they can buy put options as insurance, without worrying about selling their spot stocks too early or too late. For example, investors use8element/Buy and hold a certain stock at a price per share. When an investor judges that the stock price may decline, they can buy and exercise at a price of10A put option of yuan. If the stock price continues to rise in the future, investors can enjoy the benefits of the stock's rise; If the stock price falls below10During the Yuan Dynasty, investors can propose to exercise their rights, but still10Sell at a price of yuan. Therefore, for investors, the put option mentioned above is like an insurance policy, where the premium paid by the investor is equivalent to the premium paid.
    Similarly, when investors are uncertain about market trends, they can buy call options first to avoid short selling risks, which is equivalent to buying insurance for their cash.
    2Reduce the cost of buying stocks. Investors can sell put options with lower exercise prices to lock in a lower call price for the stock (i.e., the exercise price is equal to or close to the price at which they want to buy the stock). If the stock price is above the exercise price at maturity, the option will generally not be exercised, and investors can earn the premium from selling the option. If the stock price on the expiration date is below the exercise price and the option is exercised, investors can purchase the specified stock at the originally locked exercise price, while the actual cost is reduced due to the income from the royalty.
    3Enhance shareholding returns by selling call options. When investors hold stocks, if the probability of the stock price rising at maturity is expected to be small, they can sell call options with higher exercise prices to collect premium income and enhance their shareholding returns. If the stock price does not rise at maturity, the option will generally not be exercised, and investors will earn premium income; If the stock price rises significantly on the expiration date, exceeding the exercise price, the sold call option is exercised, and the investor sells the stock they hold at a higher exercise price.
    4By combining strategic transactions, different risk and return portfolios are formed. Thanks to the flexible portfolio investment strategy of options, investors can form different risk and return portfolios based on various market conditions through diversified combinations of call and put options with different exercise prices or expiration dates. Investors can gain a deeper understanding of the application of specific strategies.
    5Conduct directional trading that is leveraged to be bullish or bearish. For example, investors are bullish on the market, or when they need to observe for a period of time to make a decision to buy a certain stock and do not want to be short, they can buy call options. Investors use smaller investments to pay premiums, lock in buying prices, or gain amplified returns and risks.
    12、 What basic risks should investors pay attention to in individual stock options?
    Trading individual stock options is different from stocks, as it carries specific risks and may result in significant losses. Investors should fully understand their risks before deciding to participate in trading:
    1Leverage risk
    The trading of individual stock options adopts a margin trading method, and the potential losses and returns of investors may be multiplied, especially for investors who sell open options, the total losses they face may exceed the initial margin and additional margin they pay, which carries leverage risk.
    2Risk of price fluctuations
    Investors should pay attention to the price fluctuations in the stock spot market, the price fluctuations of individual stock options, other market risks, and potential losses when participating in individual stock option trading. For example, if the option seller has to bear the obligation of actual exercise delivery, the losses caused by price fluctuations may be much greater than the premium they receive.
    3The risk of individual stock options not being able to close positions
    Investors should pay attention to the risks that individual stock option contracts may be difficult or impossible to close, as well as the potential losses they may cause. For example, when there is insufficient trading volume in the market or when there is no way to find a reasonable trading price in the market, investors as holders of option contracts may face the risk of being unable to close their positions.
    4The risk of contract expiration rights becoming invalid
    Investors should pay attention to the last trading day of individual stock option contracts. If the buyer of a stock option does not exercise on the last trading day of the contract, the option value will return to zero after expiration, and the contract rights will become invalid. Therefore, investors are reminded to pay attention to whether to exercise on the expiration date of the contract. Otherwise, the option buyer may lose all the premiums paid and potential gains.
    5The risk of individual stock option trading being suspended
    Investors should pay attention to the risk of trading individual stock options being suspended when there are abnormal fluctuations or suspected violations of laws and regulations in trading.

    The above content is only for the purpose of investor education, and the listed risks do not cover all investment risks that may arise when investors participate in investment.