PostsHow to amplify returns with options in high-volatility markets?
Recently, the U.S. stock market has been fluctuating. Yesterday, we discussed the role of β in such high-volatility markets. Today, let's talk about how to use options to hedge risks or capture opportunities. I've compiled an introductory guide to options, covering everything from basic concepts to practical operations. Interested friends can take it for themselves.
1. Understanding Buyers and Sellers
Options are divided into buyers and sellers.
Buyer (Rights Holder): Pays a premium and has the right to buy or sell in the future, like placing a deposit. Profits from gains, loses the deposit if it falls.
● Long Call: Bets on a rise, potential unlimited gains
● Long Put: Bets on a fall or buys insurance for holdings
Seller (Obligation Holder): Receives a premium and bears the obligation to buy or sell in the future, like collecting insurance. Bears risks but earns when there's no risk.
● Short Call: Bets on no rise, limited gains but high risk
● Short Put: Bets on no fall, willing to take over and earn premiums
2. Understanding Price Composition
1. Price Formula: Premium = Intrinsic Value + Time Value
● Intrinsic Value = Profit from immediate exercise (only for in-the-money options)
● Time Value = Premium paid by the market for "future possibilities"
2. Three States of Value
● In-the-Money (ITM): Has intrinsic value
● At-the-Money (ATM): Intrinsic value is zero, time value is highest
● Out-of-the-Money (OTM): No intrinsic value, purely betting on the future
3. Time Decay: Time value decays over time, accelerating as expiration approaches.
3. Understanding Risk Dimensions
1. Four Major Risk Indicators
●Delta: How much the option price changes when the stock moves $1 → Directional Risk
●Gamma: How fast Delta changes when the stock moves → Acceleration Risk
●Theta: How much the option loses in value per day → Time Decay Risk
●Vega: How much the option changes in value per 1% change in implied volatility → Volatility Risk
Generally, buyers like high Gamma and high Vega, don't fear Theta, while sellers like high Theta but fear high Gamma and high Vega.
4. Practical Strategies
1. Directional Strategies
● Bull Spread: Bullish on the market but doesn't want to spend too much, buy low and sell high call options
● Bear Spread: Bearish on the market but controls costs, buy high and sell low put options
(Simply put, buy Calls in a bull market, buy Puts in a bear market)
● Covered Call: Hold stocks and sell call options for extra income
● Protective Put: Hold stocks and buy put options as insurance
2. Volatility Strategies
Bet on increased volatility by going long volatility (buy both calls and puts). Bet on decreased volatility by going short volatility (sell both calls and puts).
Risk Control Mantra:
● Don't buy deep out-of-the-money options (very low win rate)
● Don't sell deep in-the-money options (unreasonable risk-reward ratio)
● Don't trade contracts with low open interest (wide bid-ask spreads)
● Don't hold options into the final week (time value decays rapidly)
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