What Is a Digital Option?

An option is a contract that originated in the U.S. and European markets in the late eighteenth century. It gives the holder the right to buy or sell an asset at a fixed price on or before a certain date. right. The key points of option definition are as follows:

[q quán]

due to

Summary

Has a "zero-sum game" feature, and

Unique profit and loss structure

With stock,

Real options (real options) refer to

Standard European or American

In mature financial markets, options are more often used as risk management tools, such as the balanced derivatives market represented by the United States. Options are widely used in hedging strategies. The main options hedging are equal hedging strategy, static delta neutral strategy, and dynamic delta neutral strategy. Below we take Comex silver futures and options trading as an example to illustrate how speculators can use options to make a greater profit.

Scenario 1: At the beginning of September 2012, the market expects that the United States will launch QE3. On September 6, the silver futures closed at $ 32.67 per ounce, the silver futures options were priced at $ 33, and the call price was $ 1.702 per ounce. Assuming investors He is bullish on the future trend of silver. He has two speculative schemes: one is to buy 1 lot of December Comex silver futures; the other is to buy 1 lot of December Comex silver futures options (to simplify calculation, the Comex margin ratio is 10 % Calculation, the option long does not pay the margin, and the option short pays the margin in accordance with the corresponding futures amount).

Since then the Federal Reserve has launched QE3,

There are two points to avoid when using options in futures arbitrage. First, avoid increasing risk. Selling options instead of futures will increase investor risk. Second, avoid spending a large amount of time value royalties that would be wasted, thereby losing potential profits.

As the pace of domestic financial innovation continues to accelerate, investors have an urgent need for the use of new financial instruments (options). The options market has matured in Europe and the United States for decades, and the diversity of portfolios has helped investors greatly enrich their trading strategies.

Position Replacement and Copy Function

In futures speculative trading, options have the function of replacing futures positions and copying futures positions, and also have the function of resolving the risk of extreme price fluctuations.

In the option substitution function, buying call options or selling put options can replace long futures, while buying put options and selling call options can replace short futures. In the option copy function, buying call options and selling put options can copy futures longs, while buying put options and selling call options can copy futures shorts. When faced with extreme market conditions, futures prices may have multiple limit stops. This is a nightmare for investors with opposite positions, but options can help lock in risk.

Option substitution functions have restrictions and prerequisites. Taking only alternative long futures positions as an example, if investors judge the market is bullish, then buying a call option is the best choice, and the disadvantage of selling a put option is that the upper profit will be strictly limited; The market is bullish, so selling put options is a better choice. Buying call options is because the profit margin for paying premiums is smaller. If the market price falls sharply, buying call options to choose to give up exercise, the risk is limited, while the risk of selling put options and futures bulls is unlimited; if the market price declines, buying call options because of paying premium For this reason, the break-even point is the highest, the losses are relatively the largest, the futures bulls have the second largest losses, and selling put options may still make a little profit. The premium is another important prerequisite for considering the use of options. When the market is volatile, the implied volatility will be very high, which will cause the option price to be very expensive. At this time, from the perspective of futures speculation, the option substitution advantage is relatively weak.

The option copy function is more advantageous in the stock market. Theoretically, buying a call option at the same time as selling a put option with the same terms will result in the same profit chart as buying the underlying position. On the contrary, the profit chart obtained by buying put options and selling call options with the same terms is the same as the position of the target. Options margin advantage is very obvious, the margin for buying and selling one lot of crude oil futures is much higher than the margin for copying positions using crude oil futures options. Options have an advantage in the stock market, and they do not have to follow the Uptick limit and they can sell short without borrowing stock. However, because there are two buying and selling actions in the option copy, when the liquidity is encountered, the bid-ask spread risk and double commission risk will be highlighted. Volatility risk is also an important risk to be considered when using the option copy function. When the volatility weakens, the reduction of the premium will reduce the effect of the option copy function. On the contrary, when the volatility increases, the increase of the premium will enhance the effect of the option copy function.

The option copy function helps to resolve the risk of futures limit. Veteran futures investors are no strangers to futures price limits. For example, the market for agricultural products (6.09, 0.07, 1.16%) is constantly rising and falling due to weather factors. It is extremely bad if futures investors hold opposite positions in extreme conditions, but the proper use of futures options strategies can help investors lock in risk. Investors who are familiar with options rules should know that futures options also have mandatory limits. However, unlike futures, the futures option quote sequence is very extensive. Even under the limit of futures options, there are also virtual options that do not touch the limit Can trade. Using the option copy function can simulate long or short futures to help investors lock in risk.

Is a very effective insurance

Options are a very effective insurance in futures hedging transactions. Different execution prices are equivalent to providing investors with different levels of insurance. The larger the insurance coverage, the higher the insurance costs. For example, an investor holds a long lot of crude oil futures for July that expires at $ 100. Considering the downside risk in the future, the investor can choose to buy put options for protection. Investors may consider buying one July 85 put option for protection. If you want to get more downside protection, you can buy one July 90 put option, or implement full protection for futures positions, and choose to buy one July lot. 100 put options. Of course, as the execution price rises, the premium paid by investors, that is, the cost of protection, will also rise rapidly. It is believed that investors who understand the option price quote will basically think that this insurance does not have an advantage, because the put option premium, which is usually slightly out of value, is still very expensive. In terms of cost, unless crude oil prices rise significantly, potential earnings will be significantly diluted by royalties.

Sophisticated investors often consider modifying the above insurance strategy to reduce the cost of put options for insurance: futures long owners buy a handful of ill-valued put options as insurance, and sell a handful of ill-valued call options to pay Most or all of the cost of a put option is called a collar arbitrage. By using this strategy, investors forego potential gains in some upward directions, but also reduce the cost of buying put options. Investors judge whether the future market is bullish, bullish or bullish. Different positions determine the limit of the upward profit space.

Additional potential profit

In futures arbitrage, whether it is intra-market arbitrage or inter-market arbitrage, options can provide additional potential profit with very little risk. The use of options in futures arbitrage should not increase risk first, and secondly, should not pay too much time value premiums that will be wasted. The futures option arbitrage strategy often encounters that when one side of the position becomes a virtual value, the nature of the arbitrage begins to disappear, and the original position becomes a position closer to direct trading. What savvy investors need to consider is how to make aftercare .

Calendar arbitrage is an important option arbitrage strategy and can also be considered as an alternative to futures arbitrage, but there are obvious differences between the two. The underlyings of the two contracts involved in arbitrage in the futures market are the same (spot), while the underlyings of the two option contracts involved in the option calendar arbitrage are two different futures contracts, for example, buying a May call option To sell a March call option with the same strike price. Due to seasonal factors, the spread between different futures contracts fluctuates greatly. The option calendar arbitrage is two arbitrage that are traded at the same time. One is related to the relative pricing difference between two options, such as volatility, and the passage of time. Related; the second is the relationship between the spread of the two underlying futures contracts. In practice, if the spread of the underlying futures contract reverses, the loss of the calendar arbitrage investor may be greater than its initial debt. Of course, in most cases, the performance of option calendar arbitrage is better than futures arbitrage, because the theoretical pricing advantage of options in calendar arbitrage is at play.

Considerations in arbitrage

There are two points to avoid when using options in futures arbitrage. First, avoid increasing risk. Selling options instead of futures will increase investor risk. If you sell call options instead of selling futures and sell put options instead of buying futures, then when the futures price rises sharply, the risk for investors may rise sharply. If the futures price rises sharply, selling the call option will lose money; when the futures price rises above the selling put exercise price, selling the put option will also stop making a profit.

Second, avoid spending large amounts of time value rights. If investors buy put-valued or ill-valued put options instead of selling futures, the profitability of their arbitrage will be eroded because of depreciation over time. The only option strategy to replace futures arbitrage is to use real-value options. If an investor buys a real call option instead of buying futures, and buys a real put option instead of selling futures, it is often possible to create a position that has an advantage over intra- and inter-market futures arbitrage. However, in practice, it is not recommended that investors only buy options with real value to almost no time value premium, because it eliminates the possible benefits of using medium real value options: if the underlying futures price fluctuates, Even if futures spreads do not perform well, option arbitrage may still be profitable.

After investors satisfied the two principles of buying and considering only real-value options, the market experienced high volatility. At this time, one side of the option arbitrage is likely to become an imaginary value, the nature of the arbitrage begins to disappear, and the original trading position becomes a position closer to direct trading. For investors, at this time, they need to consider whether to continue to hold the arbitrage position or close the position. If you choose to continue holding, investors must face up to the potential negatives in the position because the position has been bought or sold too much. Assuming that the position is bought too much, if the futures price falls, the call option will quickly lose its value, and the put option will not benefit much because of excessive ill value, and naturally it will not be able to properly protect the call option. In this scenario, the conservative approach is to use the underlying futures of the real-valued option to hedge this option, while the more radical approach is to use the other side of the futures to hedge this real-valued option. We know that there is any possibility of market price fluctuations. If the spread between the two underlying futures does not increase but instead returns to zero, it will definitely be a loss for futures arbitrage investors, and for investors who establish a futures option arbitrage strategy, because One-sided positions were covered in the middle, and the results were almost certainly profitable.

Based on the above analysis, traders should realize that futures options have advantages over futures, but this advantage can only be realized when the option portfolio is used reasonably. In the use of options to replace futures speculation and hedging, implied volatility, transaction costs, and market judgments are all important considerations. In options to replace futures arbitrage, the two principles of reducing risk are what traders must abide by. At the same time, investment After-thinking of the combination is also necessary. Traders should understand that futures options are options on futures contracts rather than on spot commodities. When the actual market environment is more suitable for establishing futures positions, options should act as supporting roles to enhance the effect of investment portfolios.

Application and case

At present, there is no option market in China. For example, the US Comex silver futures and options trading. The domestic silver market and the international silver market plus the silver options market are better at arbitrage and hedging, and play an insurance role.

At the beginning of September 2012, the market expects that the United States will launch QE3. On September 6, the silver futures closed at $ 32.67 per ounce, the silver futures options were priced at $ 33, and the call price was $ 1.702 per ounce. The trend is bullish. He has two speculative options: one is to buy 1 lot of December Comex silver futures; the other is to buy 1 lot of December Comex silver futures options (to simplify calculations, the Comex margin ratio is calculated at 10%, The option long does not pay the margin, and the option short pays the margin in accordance with the corresponding futures amount). Since then, the Federal Reserve has launched QE3, and the price of precious metals has risen sharply. On October 1, silver futures closed at $ 34.95 per ounce, and call options at $ 33 were priced at $ 2.511 per ounce. The return of investors under the two schemes is long futures, (34.95-33) * 5000 / (33 * 5000 * 10%) = 59%. Long options, if the investor chooses to close the position, (2.51-1.70) * 5000 / (1.70 * 5000) = 47.53%; if the investor chooses to execute the option and immediately closes the futures position, (34.95-33-1.702) /1.702 = 14.57% (to give up exercise).

From this point of view, although the yield of option bulls is not as good as that of futures bulls, the capital occupancy of option bulls (1.702 * 5000) is only much smaller than that of futures bulls, which is about half of futures margin, and during the holding period , Option investors do not need to worry about insufficient margin. After the launch of QE3, investors believe that the price of silver will come out of an M head in September and October. Now the price is near the neckline. Under the background of QE3, the European debt crisis, and the U.S. fiscal cliff, it has a certain risk-avoiding nature The price of silver will not fall sharply, but there is also insufficient motivation to rise in the short term. It is more likely to fluctuate in the future, so it is decided to sell wide-span options and earn premiums.

On October 25, 2012, the silver futures price was $ 32.08 per ounce, the silver put option price was $ 33.09 per ounce, and the call option price was $ 34,300 per ounce. Investors sell both call and put options. The corresponding break-even points for investors to adopt strategies are USD 31.32 / ounce and USD 35.58 / ounce, which means that by the end of December, the fluctuation range of the Comex silver futures price will not exceed the range of USD 31.32 / ounce to USD 35.58 / ounce. . As of November 26, 2012, the market prices of the two options were $ 0.1 / ounce for put options and $ 0.275 / ounce for call options. The one-month short wide-span option portfolio strategy return of the investor is (1.409 + 0.283-0.1-0.275) * 5000 = $ 6585. If there are no options, although investors can determine that from late October to mid-November, silver is in a small correction phase in a large rising atmosphere, and the price is in shock, but relying only on futures trading, investors will bear Great psychological pressure and financial management pressure. The option portfolio strategy can turn investors' accurate judgments into earnings in a timely manner. (This is a case of Comex silver futures and options trading.)

Fixed share

1. Option model The stock option model is one of the most classic and widely used equity incentive models in the world. The main points of the content are: the company approved the shareholders general meeting to use the reserved unlisted common stock stock options as part of the package compensation, and granted or rewarded conditionally and freely at a certain option price in advance For the company's senior management personnel and technical backbones, the stock option holders can make options such as exercise and redemption within a specified period. To design and implement a stock option model, the company must be a publicly listed company with a reasonable and legal source of stocks that can implement stock options, and a capital market with a stock price that can basically reflect the intrinsic value of the stock, operate in a more standardized manner, and be in good order. Carrier. Lenovo Group and Founder Technology, which have been successfully listed in Hong Kong, implement stock option incentive models. 2. Restricted stock model Restricted stock means that a listed company grants a certain number of shares of the company to the incentive object in accordance with predetermined conditions. The incentive object can sell restricted stock only if the working life or performance target meets the conditions of the equity incentive plan. And benefit from it. 3. Stock appreciation rights model 4. Virtual stock model

Set people

Three principles of appointment: 1. Potential human resources have not yet been developed; 2. The degree of hidden information in the work process; 3. Senior managers with or without specific human capital accumulation refer to the company's decision-making, operation, and leadership Responsible personnel, including managers, deputy managers, financial officers (or other persons performing these duties), the secretary of the board of directors, and other persons specified in the company's articles of association.

Three-level theory: 1. Core layer: the mainstay (share the fate and development with the company, with the spirit of sacrifice); 2. Backbone layer: Safflower (opportunist, they are the focus of equity incentives); 3. Operation layer: Green leaves (The job is just a job.) People at different levels should be treated differently. Often, the backbone layer is the focus of the implementation of our equity incentive plan.

timing

The validity period of the equity incentive plan is calculated from the date of approval by the shareholders' meeting, and generally does not exceed 10 years. After the expiration of the equity incentive plan, listed companies may not grant any equity based on this plan. 1. During the validity period of the equity incentive plan, the stock options granted in each period shall be set with exercise restriction period and exercise validity period, and shall be exercised in batches according to a set schedule. 2. During the validity period of the equity incentive plan, the lock-up period for each restricted stock granted must not be less than 2 years. At the expiration of the lock-up period, the number of shares that can be unlocked (transferred, sold) by the incentive object is determined according to the completion of the equity incentive plan and performance targets. The unlocking period shall not be less than 3 years. In principle, a uniform unlocking method shall be adopted during the unlocking period.

Pricing

According to the principle of fair market price, the grant price (exercise price) of the equity of a listed company shall be determined not to be lower than the higher of:

1. The summary of the draft equity incentive plan announced the closing price of the company's underlying stock on the previous trading day;

2. The average closing price of the company's underlying stock within 30 trading days before the summary of the draft equity incentive plan is announced.

Quantitative

Set amount: 1. "Trial Measures for the Implementation of Equity Incentives by State-controlled Listed Companies (Domestic)" (referred to as the "Trial Measures") Article 15: Any incentive object of a listed company is granted through all effective equity incentive plans The total equity of the company shall not exceed 1% of the total share capital of the company, unless it is approved by a special resolution of the shareholders' general meeting. 2. During the validity period of the Equity Incentive Plan of the Trial Measures, the expected level of personal equity incentives of senior management personnel shall be controlled within Within 30% of the total remuneration level (including expected options or equity returns). The total remuneration level of senior management personnel shall be determined in accordance with the principles of state-owned assets supervision and management institutions or departments and determined based on the performance evaluation and remuneration management measures of listed companies.

The total amount: 1. With reference to the internationally popular option pricing model or the fair market price of stocks, scientifically and reasonably estimate the expected value of stock options or the expected return of restricted stocks. 2. According to the equity incentive income and equity grant price (exercise price) predicted by the above measures, determine the number of senior management equity grants. 3. The total salary level of each incentive object and the proportion of the expected equity incentive income to the total salary level shall be determined according to the job sequence based on job analysis, job evaluation and job duties of listed companies.