In traditional finance, an option is a financial derivative that gives the holder the right to buy or sell assets at a pre-agreed price at any time on or before a specified date. According to the division of option rights, it is divided into call options (Call Options) and put options (Put Options).
It is worth noting that options contracts do not represent ownership of an asset, nor an obligation to buy/sell it. Rather, after the buyer of the option pays a certain amount of money (referring to the option premium) to the seller, he obtains the right to buy or sell the asset by holding the option, but he does not assume the obligation to buy or sell. If the holder decides to hold the option and does not exercise it by the expiration date, it expires automatically at no additional cost or profit to the holder.
Options are one of the most popular financial derivatives used by investors to express their predictions about future price movements. For example, by buying call options, investors are betting that they expect prices to rise. Conversely, if investors think the price will fall, they can buy put options to hedge.
The price of an option is derived from the value of the underlying asset. However, there are multiple option options at different prices on an underlying asset, because the price of all options varies depending on the spot price, strike price, and contract expiration date. The price at which the option parties agree to execute the sales contract within a certain period of time in the future is called the strike price. The fee for an option contract is called a premium. The longer the remaining time on the option contract's expiry date, the more opportunities the option can be exercised (for American options), and the higher the price of calls and puts.
American options
American options
American options can be exercised at any time before the expiration date;
European options
The settlement price of an American option is the official closing price on the expiration date; unless the holder specifies otherwise, the option is automatically exercised even for 1 cent. The settlement price is the regular closing price before the market close on the third Friday, excluding after-hours trading.
European options
European-style options can only exercise the contract on the expiration date;
European index options stop trading one day in advance, that is, when the market closes on the third Thursday of the expiry month;
In European options, the settlement price is not announced until hours after the market opens and often differs from the previous night's close, making it risky to hold an overnight position.
The value of options contracts is derived from current expectations of future price events. Therefore, the higher the market's expectations for a certain price level, the more expensive options at that strike price will be. For example, if enough investors believe that Bitcoin will break through the $100,000 price level by December 2021, the December 2021 expiry and $100,000 strike price calls will be relatively expensive due to high demand. expensive. Bullish investors will push the price of the underlying asset up, so options will be more expensive. Therefore, investors often look at option prices at future maturities to assess the market's long-term price expectations.
Volatility is another key factor affecting the price of options contracts. If the price movement of an asset is expected to be volatile and has historically recorded significant volatility, its future price levels become more difficult to predict. By locking an asset at a known price level (the strike price), options are a valuable tool for hedging against future uncertainty.
in conclusion
in conclusion
Options are flexible financial instruments that allow traders to capture the potential price movement of an asset with limited downside risk. Given that the option holder has no obligation to purchase the underlying asset, the maximum net loss is only the option premium. If investors believe that the market price will fall during a certain period, they can use options to hedge, which is less risky than the futures market.
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