Herman

Herman

HomeArchives

Introduction to Options

#交易56
AI Translation
This post is translated from Chinese into English through AI.View Original
AI-generated summary
Stocks are good for holding to earn company profits and dividends. For short-term gains in the market, options trading offers more opportunities. Steps for buying options include choosing the underlying stock, strategy, strike price, and expiration date. It is important to select familiar and high-volume stocks for liquidity. Implied volatility reflects market expectations, with higher volatility leading to higher option prices. Historical volatility helps determine if current implied volatility is high or low. The value of an option consists of time value and intrinsic value. Time value decreases as expiration approaches, so it is best to choose options with lower time value. Avoid options with strike prices close to the current stock price to minimize time value loss.

Stocks are suitable for holding to obtain company earnings and dividends. If you want to make money in the market in the short term, you can choose options trading, which offers more opportunities to earn money.

Steps to buy options:

  1. Choose the underlying stock.
  2. Choose the options strategy.
  3. Choose the strike price.
  4. Choose the expiration date.

Choose the Underlying Stock#

Choose an underlying stock that you are familiar with. Additionally, choose a stock with high trading volume.

The reason for choosing a stock with high trading volume is liquidity. Stocks with high liquidity are easier to buy or sell options for. If a stock has low trading volume and poor liquidity, even if you hold a valuable option, it will be difficult to sell at the desired price.

Choose the Options Strategy#

There are two concepts here: Implied Volatility and Historical Volatility.

Implied Volatility is mainly used to quantify the implied market expected volatility in option prices, reflecting the market's expectations for the underlying stock.

Options with higher Implied Volatility are more expensive. Both call options and put options are affected by this. Higher volatility indicates a higher possibility of price increase/decrease, resulting in higher option value.

I don't quite understand why higher volatility leads to higher prices. Because the name "volatility" itself doesn't reveal whether the stock is more likely to go up or down. Why does higher volatility mean higher prices?

In fact, options are a form of insurance.

Let's take a real-life example. If you are older, the price of buying medical insurance will be higher because the probability of you getting sick is much higher than that of younger people.

Looking back at a call option, if I buy an option from you to buy BTC at $6,300 the day after tomorrow, you can interpret it as me buying an insurance policy. This policy guarantees that I can buy BTC at a price of $63,000 the day after tomorrow.

Therefore, if the probability of this event happening is higher, the price of the insurance policy will be higher. If the probability of this event happening is lower, the price of the insurance policy will be lower. If the market price exceeds the strike price I set, the policy will become more valuable because the excess amount is considered profit.

The ideal situation is to buy options when IV is low and sell options when IV is high.

Historical Volatility is a reference concept. It exists to help determine whether the current IV is high or low.

  • If the current IV is higher than HV, we consider the current IV to be high, and the strategy leans towards selling options.
  • If the current IV is lower than HV, we consider the current IV to be low, and the strategy leans towards buying options.

Choose the Strike Price and Expiration Date#

The value of each option can be divided into two parts:

  • Time value
  • Intrinsic value

Let's explain this concept with an example. For example, under the following conditions:

  • I am bullish on BTC.
  • I believe it can reach $62,500 in one week.
  • The current market price of BTC is $63,000.

Now, I want to buy a call option for BTC at $62,500 one week from now. How much does this option cost?

  • The current market price can sell for $63,000. If I want to buy this option, I have to pay $500. Otherwise, who would be willing to sell you this insurance?
  • At the same time, I also need the seller to wait for me for a week before I exercise my rights. Therefore, I need to pay a cost for this one-week period. Let's assume it is $10.

I need to spend $510 to purchase this option.

Based on the above definitions and explanations, we can easily understand:

  • As time passes, the time value will gradually decrease.

    It is easy to understand that the longer the time to expiration, the more time there is for price fluctuations, and the higher the possibility of reaching or exceeding the strike price.

    The shorter the time to expiration, the less likely there will be price fluctuations, and naturally, the lower the value.

    As long as you hold the option, the time value will continue to decrease, and the option will continue to depreciate.

  • The closer the strike price is to the current stock price, the higher the time value. Because the closer it is, the higher the possibility of reaching the strike price, and the remaining time is limited. Therefore, the time value will be very high.

  • If we rely on intrinsic value to make money, there is still the risk of misjudgment, where the option does not reach the strike price or moves further away from it.

This is the risk point in options trading. Time value will decrease over time, and if there is a misjudgment in intrinsic value, the option will become worthless.

Returning to the selection:

  • Since time value will continue to decrease, naturally, we hope to choose options with a lower proportion of time value.
  • Try not to choose options with strike prices close to the current price. Because the time value is high, it will decrease rapidly as time passes.
Loading...
Ownership of this post data is guaranteed by blockchain and smart contracts to the creator alone.