Rich Dad’s Financial IQ Cultivation: Stock Fundamentals

Chapter 21 How to Trade Stocks (5)
There are generally three factors that need to be considered in option trading: The first is the term of the option, that is, the validity period of the option.It is an important part of options trading, generally about three months.Each exchange has an upper limit on this; the second is the type, quantity and agreed price of the stocks traded; the third is the option premium, also known as insurance premium, which refers to the price of the option.

The most notable features of options trading are: (1) The object of the transaction is a right, a transaction about the right to buy or sell securities, rather than any real object.This kind of right has a strong timeliness, and it can only be exercised within the effective date stipulated in the contract. Once the time limit stipulated in the contract is exceeded, it will be regarded as an automatic waiver and become invalid. (2) The rights and obligations enjoyed by both parties to the transaction are different.The option buyer has the right to choose, and he has the right to decide whether to execute the contract within a specified time and according to market conditions. (3) Options trading is less risky.For investors, the biggest risk of using option trading to buy and sell securities is just the cost of buying options.

Option trading can be divided into buying option trading and selling option trading.

1. Buy options
Call options, also known as call options or "knock-ins."A call option refers to the right of the holder of the agreement to purchase stocks at a specified price and quantity within the validity period specified in the agreement.The option buyer buys this call option because he is bullish on the stock price and can make a profit in the future.After purchasing the option, when the market price of the stock is higher than the sum of the agreed price plus the option fee (commission not included), the option buyer can purchase the stock at the price and quantity stipulated in the agreement, and then sell it at the market price, or transfer the purchased option to obtain Profit; when the stock market price fluctuates between the sum of the agreed price plus the option fee, the option buyer will suffer a certain loss; when the stock market price is lower than the agreed price, the option buyer's option fee will all disappear and will give up the purchase options.Therefore, the maximum loss for an option buyer is nothing more than the option fee plus commission.

2. Sell options
Selling options is the symmetry of buying options, also known as put options or "knock out", which means that traders buy a right to sell securities at an agreed price within a certain period of time.After purchasing the put option, the buyer has the right to sell a certain amount of certain securities to the option seller according to the agreed price within the specified time.Among the many trading methods in the securities market, generally speaking, people are willing to buy and sell options only when the securities market has a downward trend.Because during the validity period of the selling option, when the security price falls to a certain level, the buyer can exercise the option to make a profit.In addition, if the option premium rises due to the bearish market of the stock, the customer can also sell the option directly, so that he not only earns the difference in the option premium before and after, but also transfers the risk of a sudden rise in the stock market .However, if the stock market maintains the level of 100 yuan per share within these three months without falling, or even gradually maintains the level of 100 yuan per share within these three months, does not decline, or even gradually rises, then , no matter whether the customer exercises the option, sells the stock or transfers the option, not only is there no profit, but also the loss of the option fee.Therefore, put options are generally only used when the securities market is bearish.

It can be seen that both call options and sell options can only be exercised within a specific range, and no matter which method the customer chooses, there is still a certain risk.

The difference between option trading and futures trading is: First, both parties to an option transaction, when signing a contract or completing a transaction, the option buyer must pay the option seller a purchase option fee, such as 2 yuan or 3 yuan per share, while both parties to a futures transaction There is no economic relationship at the time of signing the contract.Second, the option trading agreement itself is a spot transaction, and the buying and selling of options and the payment of option fees are carried out at the same time. (Slightly different from the spot delivery transaction is that the spot transaction has not been closed after delivery, and the purchase or sale of stocks will be subject to the future agreement stipulated that after delivery, the transaction is still not closed, and the purchase or sale of stocks It will be realized within the validity period stipulated in the future agreement.) The delivery of futures trading is carried out on the agreed delivery date.Third, after the option transaction is delivered, the legal relationship between the two parties is not terminated immediately, because although the rights have been transferred, the realization of the option is in the future, and the legal relationship between the two parties must be terminated when the agreement expires, while the futures After the transaction is completed, the legal relationship between the parties to the transaction is terminated.Fourth, during the delivery period of option trading, the buyer of the option does not assume any obligations. It decides whether to implement the agreement according to the changes in the stock price. It is only borne by the option seller, while both parties to the futures transaction are obligated for each other within the validity period of the agreement.Fifth, the holder of the option trading agreement can transfer and sell the agreement. No matter how many times the transfer is made, within the validity period, the final holder of the agreement has the right to require the seller of the option to execute the agreement, while neither party to the futures trading agreement transfer of rights.Sixth, the biggest risk of investing in options is directly proportional to the fluctuation of stock price. The greater the fluctuation of stock price, the greater the risk.

The main functions of option trading for buyers are: (1) It can obtain larger profits. (2) Control risk and loss. Anyone engaged in securities trading hopes to make a profit, and the key to profit is to accurately predict the future market. However, in the ever-changing securities market, no one can guarantee that their predictions are absolutely accurate.Once the securities market goes against the direction of the trader's prediction, the losses will be disastrous.If option trading is adopted, once the above situation occurs, the trader can give up the execution of the option, so no matter how big the difference between the actual market change and the trader's prior prediction is, the option buyer will lose the most in the option premium, not more.In this way, the risk loss in the transaction is controlled in advance within a certain range.

The effect of option trading on the seller is to expand business and obtain option fee income.According to the statistics of the Chicago Board Options Exchange, more than 3/4 of the option transactions are not executed, so that the seller can obtain a considerable option fee income.

Five, buy short

Short-buying is also known as "long trading". The symmetry of short-selling refers to the voting activity in which traders use borrowed funds to buy futures in the market, hoping to sell them at a high price when the price rises in the future, and profit from it.In the modern securities market, short-buying transactions are generally carried out using margin accounts.When a trader thinks that the price of a certain stock has a rising trend, he pays a part of the margin and borrows funds from the securities company to buy the stock futures. The bought stock cannot be taken away by the trader. in securities companies.If the stock price really rises in the future, when it rises to a certain level, he sells the stock to the market at a high price and returns part of the proceeds to the securities company's loan, thus ending his short position.Traders earn money from the price difference between buying and selling.Of course, short buyers are not only unprofitable, they will suffer losses if the market's stock price moves against traders' forecasts.In the above process, the trader does not have any stocks to deal with, but buys stocks in the market, so it is called "short buying" transaction.

Short-buy trading funds are mainly borrowed funds.Generally, investors use their own funds when conducting securities transactions, and when traders buy short, in addition to paying a small amount of margin, most of the funds for buying stocks are advanced by securities companies, that is, they mainly rely on borrowed funds for transactions. .The whole process of short-buying transaction is composed of two transactions of buying first and then selling stocks.

[-]. Short selling

Short selling means that when a certain stock price is bearish, stock investors borrow the stock from the broker and sell it. When the stock price falls, they buy the stock at a lower price and return it to the broker, thereby earning a profit. Take the middle price difference.There are three main sources of stocks that short sellers sell when they operate short sales: one is their own broker, the other is trust companies, and the third is financial institutions.Lending shares to short sellers is beneficial to the lender because it not only provides comprehensive service to the client, but also increases the value of the stock.Regardless of whether the loan of stock is conditioned on the collection of interest or the appreciation of the stock price, it is a kind of income for the lender.At the same time, lenders often take steps to protect themselves by depositing proceeds from short-seller sales into brokerage accounts.

There are two forms of short selling.First, the short seller sells the stock at the prevailing market price and makes up the difference when the stock falls, thereby earning a profit from the difference; second, the seller is unwilling to deliver the stock he owns now and sells the stock as a short sale , in order to prevent the stock price from falling, so as to play a role in preserving value.If the stock price does fall at that time, he can buy the stock at a lower market price. Without considering the cost, the profit from short selling in this way will offset the loss of owning the stock, so that the loss can be avoided.According to the purpose of short sellers, short selling can be divided into three categories: one is speculative short selling.In this case, the purpose of the short seller to sell the stock is to expect the price of the stock to fall, and then buy the same stock at a lower price when it expires. The difference between the two prices is the profit of the short seller.This kind of short selling is highly speculative, with high risks and high profits.Speculative short selling has a greater impact on the stock market, because when short sellers sell stocks, the supply of stocks will increase, and the price of stocks will also fall; rise.The second is short selling for hedging.The fundamental purpose of this kind of short selling is to avoid the loss caused by the decline of the stock price.The third is technical short selling.This kind of short selling behavior can be divided into three situations: the first one is short selling based on all stocks, which includes tax purposes, value preservation purposes and expected delivery purposes;

The second type is short selling for the purpose of arbitrage, which has arbitrage in different markets and different time; the third type is short selling operated by brokers or securities dealers, in which there are not only professional members, securities dealers, but also investors Banks and other financial institutions.

Due to the strong speculative nature of short-selling transactions, which has a greater impact on the stock market, the behavior of short-sellers is obviously speculative. Therefore, the laws of various countries have detailed regulations on short-selling to minimize the adverse effects of short-selling. Short selling of stocks is prohibited by law in some countries.

(End of this chapter)