Talking about the logic of option trading: main or auxiliary? (1)

Do you know how to use option instruments? What is the positioning and purpose of using options? Which Greek letter are you actually making money on? Can you still use option strategy to "sell high and buy low"? The strategy of combining futures, spot, and options was originally constructed like this!

A core topic I want to talk to you today: the option logic of traders, is the option the main force or the auxiliary? For many option traders, this question is not very clear. I hope to explain this very basic logic to you through some of my own trading practices.

What are options? It is a derivative, and it is also a contract about a certain right. These academic definitions are correct. In practice, however, options are essentially investment vehicles. On the one hand, we must be good at using high-end tools when making investments. As the saying goes, if you want to do a good job, you must first sharpen your tools. Options are the pearl of derivatives. Its use strategies are ever-changing, so it is very important to learn options well.

The way to use the tool of options is the option strategy. Strategically, we need to clarify the trading positioning of options:

(1) Let options play the main role (the main profit is hoped to come from option trading), there are mainly two directions.

The first direction, based on the price judgment of the subject matter, uses option tools to speculate on the price direction and make money on the price. Because options have a wealth of ways to play, and its leverage can be large or small, when we want to trade excess profits, we can use option tools to fight for more profits and earn money based on direction judgment. .

In the second direction, in addition to the expectation of the underlying direction, the option itself has a volatility. In addition to being related to the price of the underlying, the price of the option is also highly related to the volatility, so you can make money in the direction of the volatility.

(2) Allow options to assist (to match the original strategy). There are mainly two directions.

The first direction is to keep the original strategy unchanged, use option tools to control the risk of the original strategy, and buy insurance.

In the second direction, the core strategy remains unchanged, and option tools are used to enhance income and collect rent.

The first direction of the main force of options is to make money from the price, and use options to speculate on the direction of the underlying price. The core of the trading ability is the timing of the target price direction, coupled with the selection of a reasonable option strategy. The first is to judge the direction of the price, and the second is the timing of the option strategy. The source of profit is the appreciation of the option portfolio brought about by the underlying price movement. In technical terms, what you earn is delta (the change in option price brought about by the change in the underlying price).

The second direction is to earn money from volatility, using options to speculate in the direction of implied volatility. The core of trading ability is the timing of implied volatility of options, coupled with reasonable option strategy selection, the most important thing is options The timing of implied volatility focuses on the judgment of the future volatility expectations of the underlying. The source of profit is the appreciation of the option portfolio brought about by the operation of the implied volatility of options. Vega is the core trading parameter of this strategy.

However, the volatility of the foreign exchange market is too low now, and the market fluctuates most of the time, which determines that it is not feasible to play the main role in options in the foreign exchange market, and it is difficult to make money in the long run! But it’s different in the stock market. You can see the huge profits made by a big A-share option a few days ago on a house in Shanghai. Tomorrow, let's continue to talk about playing support with options.