Buying at the bid and selling at the ask is how market makers make their living.
- Volume (VLM) simply tells you how many contracts of a particular option were traded during the latest session.
- The "bid" price is the latest price level at which a market participant wishes to buy a particular option.
- The "ask" price is the latest price offered by a market participant to sell a particular option.
一個Trade有買 (Bid)有賣 (Ask)先至會成交(Deal)
Why Use Options?
- Speculation (投機)
Speculation is a wager on future price direction. A speculator might think the price of a stock will go up, perhaps based on fundamental analysis or technical analysis. A speculator might buy the stock or buy a call option on the stock.
Speculating with a call option—instead of buying the stock outright—is attractive to some traders since options provide leverage. An out-of-the-money call option may only cost a few dollars or even cents compared to the full price of a $100 stock. (刀仔鋸大樹)
- Hedging (對沖)
Options were really invented for hedging purposes. Hedging with options is meant to reduce risk at a reasonable cost. Here, we can think of using options like an insurance policy. Just as you insure your house or car, options can be used to insure your investments against a downturn. (減低損失和控制風險)
The naked shorting tactic is high-risk but also poses a high reward.
How Options Work?
In terms of valuing option contracts, it is essentially all about determining the probabilities of future price events. The more likely something is to occur, the more expensive an option would be that profits from that event.
For instance, a call value goes up as the underlying stock goes up. The less time there is until expiry, the less value an option will have. This is because the chances of a price move in the underlying stock diminish as we draw closer to expiry. This is why an option is a wasting asset. (時間越短，變數越少)
Since time is a component to the price of an option, a one-month option is going to be less valuable than a three-month option. This is because with more time available, the probability of a price move in your favor increases, and vice versa. (唯一確定的是時間一定會過)
The same option will be worth less tomorrow than it is today if the price of the stock doesn’t move. (時間上的消磨對Short side OTM 有利)
Volatility also increases the price of an option. This is because uncertainty pushes the odds of an outcome higher. If the volatility of the underlying asset increases, larger price swings increase the possibilities of substantial moves both up and down.
Greater price swings will increase the chances of an event occurring. Therefore, the greater the volatility, the greater the price of the option. Options trading and volatility are intrinsically linked to each other in this way.
The majority of the time, holders choose to take their profits by trading out (平倉) their position. This means that option holders sell their options in the market, and writers buy their positions back to close.
Only about 10% of options are exercised (行駛), 60% are traded (平倉) out, and 30% expire worthlessly. (到期變廢紙)
What are the three important characteristics of options?
The 3 important characteristics of options are:
- Strike Price: This is the price at which an option can be exercised.
- Expiration Date: This is the date at which an option expires and becomes worthless.
- Option Premium: This is the price at which at an option is purchased.
What is the difference between American options and European options?
American options can be exercised any time before expiration but European options can be exercised only at the stated expiry date.
Source: Investopedia
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