[Moomoo Basics] What you should know about options (1)
“Can you popularize science about options?”
“Where are options traded?”
............
Yujuanjun often sees Moo friends asking this kind of question in the Moo community~
To this end, we are starting to popularize the science of options in the Moomoo Basics series
Let's start with the most basic knowledge~
“Where are options traded?”
............
Yujuanjun often sees Moo friends asking this kind of question in the Moo community~
To this end, we are starting to popularize the science of options in the Moomoo Basics series
Let's start with the most basic knowledge~
Note: The high-risk nature of options trading is not suitable for all investors and may expose investors to potentially rapid and significant losses.
What are options?
Options It is a type of power. An option holder can buy or sell the corresponding stock at a certain time in the future at the price agreed upon by the option.
This power can be traded on the US stock market, and the price at which this right is traded is called a premium.
This power can be traded on the US stock market, and the price at which this right is traded is called a premium.
Classification of options
Options have a few key concepts:
● American options or European options. For American options, the buyer can choose to exercise rights at any time before the expiration date; for European options, the buyer can only exercise rights on the maturity date. US stock options are all American options.
● American options or European options. For American options, the buyer can choose to exercise rights at any time before the expiration date; for European options, the buyer can only exercise rights on the maturity date. US stock options are all American options.
● Expiration date (also known as the exercise date for European options). If you bought an option that expires on December 4, 2020, then the option will expire after that date.
● Exercise price Also known as the execution price, the buyer and seller execute according to the exercise price. Even if the market price of X shares is $10, and you buy a $15 call option, then $15 is the exercise price. If you exercise your rights, you have to buy the stock at $15.
● Premium is the cash value of an option. The cash value of an option fluctuates over time and the price of the underlying item.
● A contract. The unit of an option is a contract. For US stock options, each contract is generally the right to 100 shares.
Accordingly, you can directly buy (or short sell) these two options, so there are 4 operations:
● Buy call options (Long Call)
● Short selling of call options (short call)
● Buy a put option (Long Put)
● Short selling put options (short put)
● Buy call options (Long Call)
● Short selling of call options (short call)
● Buy a put option (Long Put)
● Short selling put options (short put)
Here'sshort selling It's not about selling; it means you don't have to wait until you have the corresponding options before selling; instead, you can sell directly, just like shorting a stock.
The rights and obligations of the buyer and short seller of an option are not equal. The buyer of an option has the right to exercise the right, but there is no obligation to exercise the right (that is, it can choose not to exercise the right); the short seller of an option has an obligation to accept the buyer's exercise of power. This kind of “exercised” obligation is called an option assignment.
Unlike shorting stocks, since options have an expiration time, if the short seller is not assigned after the expiration date, the option position expires and is cancelled, and the short seller's premium income is profitable.
If a short selling option is assigned, corresponding obligations are required:
●If you are short selling a call option, then you need to sell the corresponding stock at the specified price. If you don't have it, you will generate stock shorts at the cost of the exercise price.
● If you are short selling a put option, then you need to buy the corresponding stock at the specified price. Your account must have sufficient purchasing power to buy the corresponding stock, otherwise the position may be forcibly closed.
Options are classified by exercise price
For US stock options, weStrike price Compared to the current stock price (stock price), there are three situations, namely in-the-money (in-the-money), at-the-money (at-the-money), and off-price (out-money).
Regarding in-price, affordability, and off-price, it can be understood as follows:
1. Buy a call option (Long Call): Trader A buys this option and has the right to buy the underlying item at the agreed price for some time in the future. Because A thinks the future price will be higher, and this agreed price is lower than the future price, thus making a profit.
2. Buy a put option (Long Put): Trader B buys this option and has the right to sell the underlying item at the agreed price for some time in the future. Because B believes that future prices will definitely be lower than agreed, thus making a profit.
3. Selling a short call option (short call): Trader C sells this option and has an obligation to sell the underlying item for some time to come. Because C believes that the agreed price will be higher than the future price, thus making a profit.
4. Selling a short put option (short put): Trader D sells this option and has an obligation to buy the underlying item for some time to come. Because D thinks the agreed price will be lower than the future price, it makes a profit.
2. Buy a put option (Long Put): Trader B buys this option and has the right to sell the underlying item at the agreed price for some time in the future. Because B believes that future prices will definitely be lower than agreed, thus making a profit.
3. Selling a short call option (short call): Trader C sells this option and has an obligation to sell the underlying item for some time to come. Because C believes that the agreed price will be higher than the future price, thus making a profit.
4. Selling a short put option (short put): Trader D sells this option and has an obligation to buy the underlying item for some time to come. Because D thinks the agreed price will be lower than the future price, it makes a profit.
Therefore, for options with different exercise prices and the price of the underlying stock, the relationships within the price, parity, and outside the price are as follows:
● Call options, and exercise price > current stock price. Options for this period are outside the price.
● Call options, and exercise price = the current price of the stock. Options are affordable during this period.
● Call options, and the exercise price < the current stock price. Options for this period are within the price.
● Put options, and the exercise price < the current price of the stock. Options for this period are in addition to the price.
● Put options, and exercise price = the current price of the stock. Options are affordable during this period.
● Put options, and exercise price > current stock price. Options for this period are within the price.
● Call options, and exercise price = the current price of the stock. Options are affordable during this period.
● Call options, and the exercise price < the current stock price. Options for this period are within the price.
● Put options, and the exercise price < the current price of the stock. Options for this period are in addition to the price.
● Put options, and exercise price = the current price of the stock. Options are affordable during this period.
● Put options, and exercise price > current stock price. Options for this period are within the price.
What are the important elements of a US stock options contract
An options contract can be understood as a contract where the buyer and seller agree to trade the underlying object (US stock) at a specific price before some point in the future.
In this example, if you hold (buy) this option, this means you can buy 100 shares of $AAPL at $120/share before December 31, 2020.
Consider the premium cost of purchasing an option. Let's say you buy this option at a price of $10 (the cost is $10*100 = $1000). If the price of AAPL is $150, then you can make a profit of $ (150-120-10) *100 = $2000 if the price of AAPL is $150;
If the price of AAPL is $110 or less, the exercise is not profitable, and you can choose not to exercise it.
Note: Generally speaking, for more liquid options, the profit from closing a position is higher than exercising an option.
Consider the premium cost of purchasing an option. Let's say you buy this option at a price of $10 (the cost is $10*100 = $1000). If the price of AAPL is $150, then you can make a profit of $ (150-120-10) *100 = $2000 if the price of AAPL is $150;
If the price of AAPL is $110 or less, the exercise is not profitable, and you can choose not to exercise it.
Note: Generally speaking, for more liquid options, the profit from closing a position is higher than exercising an option.
If you knock out (short sell) this option, you are obligated to sell 100 AAPL shares for $120 before December 31 of this year. If your counterparty chooses to exercise power, you are obligated to execute the assignment. The maximum benefit of a short selling option is the premium obtained, and the maximum loss can be very large.
Take this option contract as an example. The important elements of a US stock options contract are:
1. Call (Call): The option holder (buyer) has the right to buy the object (s) at strike price (strike), and the knock-out option holder (writer) has the corresponding obligation to perform the contract.
2. Put (Put): The option holder (buyer) has the right to sell the object (s) at strike price (strike), and the knock-out option writer (writer) has the corresponding obligation to perform the contract.
3. Subjects (Objectives): represents the type of transaction agreed upon by the buyer and seller of the option contract. The subject matter here is AAPL shares.
4. Strike Price (Strike Price): The exercise price agreed between the option taker and the holder. The exercise price is $225, which means that before the expiration date, options contract holders can buy or sell AAPL shares at a price of $225 per share
5. Expire Date (Expire Date): Before this time, the option can be traded and exercised; after this time, the option is voided and becomes a piece of waste paper.
6. Contract size (contract size): The trading unit for stock options is 1 sheet. For US stock options, 1 sheet = 100 shares. That is, after putting the right, sell 100 AAPL shares. Note: Options contracts may be less than 100 shares due to corporate actions.
7.Premium premium : It indicates the monetary cost of an option holder to obtain rights, which can be understood as the price of an option.
8. American options: US stock options are American options and can be exercised any day before the expiration date.
9. Settlement type (settlement type) of options: US stock options are physical settlement (phyical settlement), index options are cash settlement (cash settlement). Physical delivery means that after the option is exercised, the corresponding object is obtained or sold. For example, after putting the option is exercised, AAPL shares are delivered.
2. Put (Put): The option holder (buyer) has the right to sell the object (s) at strike price (strike), and the knock-out option writer (writer) has the corresponding obligation to perform the contract.
3. Subjects (Objectives): represents the type of transaction agreed upon by the buyer and seller of the option contract. The subject matter here is AAPL shares.
4. Strike Price (Strike Price): The exercise price agreed between the option taker and the holder. The exercise price is $225, which means that before the expiration date, options contract holders can buy or sell AAPL shares at a price of $225 per share
5. Expire Date (Expire Date): Before this time, the option can be traded and exercised; after this time, the option is voided and becomes a piece of waste paper.
6. Contract size (contract size): The trading unit for stock options is 1 sheet. For US stock options, 1 sheet = 100 shares. That is, after putting the right, sell 100 AAPL shares. Note: Options contracts may be less than 100 shares due to corporate actions.
7.Premium premium : It indicates the monetary cost of an option holder to obtain rights, which can be understood as the price of an option.
8. American options: US stock options are American options and can be exercised any day before the expiration date.
9. Settlement type (settlement type) of options: US stock options are physical settlement (phyical settlement), index options are cash settlement (cash settlement). Physical delivery means that after the option is exercised, the corresponding object is obtained or sold. For example, after putting the option is exercised, AAPL shares are delivered.
This is the end of the Moomoo Basics series, see you in the next installation~
We will update the second issue later, or have other basic knowledge series you want. Please leave a comment below~
We will update the second issue later, or have other basic knowledge series you want. Please leave a comment below~
At the end of the day, I want to remind you once again to play with Jun:
Note: The high-risk nature of options trading is not suitable for all investors and may expose investors to potentially rapid and significant losses.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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