Options Theory Learning Guide

5-minute read
Options
Edit

This article aims to help beginners and advanced investors understand the basic concepts, strategies, and application scenarios of options. An option is a risk management tool that can be used for hedging risks or as a leverage tool to achieve high returns.

Table of Contents 🔗︎

  1. Overview of Options
  1. Basic Concepts
    • Buyer’s Option and Seller’s Option
    • Call Option and Put Option
  • Royalty fee and strike price
  1. Options Trading Strategies
    • Buy Call (Short Call)
    • Buy Put (Short Put)
  • Sell Call (Long Call)
    • Sell Put (Long Put)
  1. Combination Option Strategies
    • Bear Call Spread（Bull Put Spread）
  • Bull Put Spread (Bull Put Spread Option)
  1. Case Analysis: Duan Yongping’s Sell Put Operation
  2. Term Explanation

Option Overview 🔗︎

  • Options are not futures: Options are a risk hedging tool, not a speculative tool.

  • The dual nature of options:

    • Insurance function: Provides protection for stock investments.
    • Leverage tool: Aims for high returns with low cost.
  • Core Principles:
    • Buy Call when bullish, buy Put when bearish.
    • Even if an option reaches the strike price before expiration, it does not necessarily mean it will be exercised; it will only be exercised or expire upon expiration.

Basic Concepts 🔗︎

Call Option and Put Option 🔗︎

  • Buy Option：

    • Buy Call：When investors believe the stock price will rise, they purchase it to obtain the right to buy the stock at a preferential price.
    • Buy Put：When investors believe the stock price will fall, they purchase it to obtain the right to sell the stock at a certain price.

  • Sell Option:

    • Sell Call：The investor sells when they believe the stock price will not rise significantly, earning the premium.
    • Sell Put：The investor sells when they believe the stock price will not fall significantly, earning the premium.

Call Option and Put Option 🔗︎

  • Call Option:

    • Buy Call: Used when expecting the stock price to rise.
    • Sell Call: Used when expecting the stock price to stay flat or experience slight fluctuations.

  • Put Option:

  • Buy Put：Used when expecting the stock price to fall.
    • Sell Put：Used when expecting the stock price to remain flat or experience slight fluctuations.

Premium and Strike Price 🔗︎

  • Premium：The fee paid or received by both parties in the option trade.
  • Strike Price: The price agreed upon in the option contract for buying or selling the stock.
  • Intrinsic Value and Time Value:
    • Intrinsic Value: The difference between the option’s strike price and the market price.
    • Time Value: The premium of the option due to the time remaining until expiration, which gradually decreases as the expiration date approaches.

Options Trading Strategies 🔗︎

Buy Call (Short Call) 🔗︎

Scenario: Market trend is upward, utilizing buy call options to earn profits from rising volatility. 🔗︎

Assumption:

  • Current stock price: $50
  • Option cost: $1 per share (1 option contract = 100 shares) Operations:
  1. Exercise: If the stock price rises to $60, buy 100 shares at the $50 exercise price, then sell them at $60, making a profit of $900 (minus $100 option cost).
  2. Selling Options: Directly sell the options at a price of $10 per share, making a profit of $900. Precautions:
  • Volatility (IV) below 60, avoid being exercised due to excessive volatility.
  • Time Decay: Choose options with longer expiration dates.

Buy Put (Short Put) 🔗︎

Scenario: Market trend is downward, using a put option to protect stock value. 🔗︎

Assumptions:

  • Current stock price: $50

  • Option cost: $1 per share (1 option contract = 100 shares) Operation:

  1. If the stock price falls to $40, sell 100 shares at the $50 strike price, then buy back at $40, making a profit of $900 (after deducting $100 option cost). Essence: Hedging concept, suitable for stocks with significant short-term volatility.

Sell Call (Long Call) 🔗︎

Scenario: When the stock price is sideways or when you want to take profits, sell call options to earn premium. 🔗︎

Operation:

  • Hold the stock as collateral and sell call options.

  • If the stock price falls, you can buy out-of-the-money put options (Long Put) to construct a collar. Precautions:

  • Avoid naked selling of Call options (without stock coverage) to prevent losses from a sharp rise.

Sell Put (Long Put) 🔗︎

Scenario: Earn premium by selling put options with cash collateral. 🔗︎

Operation:

  • Sell put options and receive the premium immediately.

  • If the stock price does not fall below the strike price, it will not be exercised, and the premium is retained.

Precautions:

  • Choose large-cap stocks (less susceptible to manipulation).
  • Keep the Delta value around 0.3.

Combination Option Strategies 🔗︎

Bear Call Spread（Bullish Call Spread） 🔗︎

Scenario: Bearish market with a bearish outlook. 🔗︎

Operation:

  1. Sell a Call with a lower strike price (e.g., 210 yuan).

  2. Buy Calls with a higher strike price (e.g., 215 yuan).

Result:

  • If the stock price does not exceed 210 yuan, the option expires worthless, and the net profit is the premium.
  • If the stock price rises significantly (e.g., to 230 yuan), use a Spread to reduce losses.

Bull Put Spread (Bull Put Spread Option) 🔗︎

Scenario: Bullish market outlook. 🔗︎

Operation:

  1. Sell a put with a higher strike price.

  2. Buy Put options with lower strike prices.

Result:

  • If the stock price does not fall below the strike price, the option expires worthless, and the net profit is the premium received.
  • If the stock price drops significantly, use a Spread to reduce the loss.

Case Analysis: Duan Yongping’s Sell Put Operation 🔗︎

Background:

  • Duan Yongping plans to sell put options on Alibaba, with a strike price of $70, and the expiration date is January 17, 2025.

Analysis:

  1. Option Premium Revenue: Sold 1199 Put contracts, with a profit of $865 per contract, totaling approximately $1.04 million.

  2. Margin Requirement: Based on a 100% margin requirement, $8.39 million needs to be prepared to take over the position.

  3. Return Calculation:

    • Government bond interest + Option premium revenue ≈ 18% annualized return. Conclusion:
  • If the stock price is below $70, buy the stock at $70 after exercising the option.
  • If the stock price is above $70, the premium is pure profit.

Glossary Explanation 🔗︎

  • Option: Option

  • Call: Call option

  • Put: Put option

  • Spread: Spread

  • Long：Buy

  • Short：Sell

  • Credit：Net premium inflow

  • Debit：Net premium outflow

  • Strike Price: Strike price

  • Premium: Premium

  • ITM: In The Money (实值)

  • OTM: Out Of The Money (虚值)

  • ATM: At The Money