What is an option?

What is an option?


An option means that the buyer has the right to choose to buy or sell the agreed asset at the strike price at the agreed time in the future, and the seller of the option must assume the obligation to perform when the buyer chooses to exercise.


What are the main differences between commodity options and commodity futures?

First, the trading objects are different. The object of commodity futures trading is a standardized contract involving a certain number and grade of commodities; The object of commodity option trading is a right to buy or sell some subject matter (real commodities or commodity futures contracts).

Second, the rights and obligations of both parties are different. Both the buyer and seller of futures have equal rights and obligations under the contract; The buyer of an option has the right to buy or sell commodities (or futures contracts), while the seller has the obligation to perform.

Third, the buyer and seller have different risk returns. Both the buyer and seller of futures are faced with unlimited risks and benefits; The potential profit of the option buyer is uncertain and the loss is limited. The maximum loss is the premium paid for the call option. The maximum income of the option seller is limited. The maximum income is the premium received from the put option contract. The potential loss is uncertain.

Fourth, margin collection methods are different. Both the buyer and the seller of futures shall pay the margin; The option buyer pays the premium instead of the deposit, and the option seller must pay the deposit when collecting the premium.

Fifth, trading opportunities are different. Futures are mainly traded in the direction of commodity (or futures contract) price changes; Options can be traded based on the direction of price change or price volatility.

Sixth, hedging effects are different. Futures hedging needs to be marked to the market day by day, the capital occupation is uncertain, and favorable market price changes need to be abandoned; The call option hedging only needs to pay the premium and lock in the highest cost, which can benefit from favorable market price changes.

Seventh, the types of contracts are different. Futures have only one futures contract in different months, and investors can buy or sell futures contracts in this month; Options can have many call option contracts and put option contracts with different exercise prices and the same expiration date in a month. Investors can buy or sell call option contracts or put option contracts.

Eighth, different delivery methods. The commodities or assets traded in futures must be delivered at maturity unless the futures contract is sold before maturity; The option trading can realize the delivery of commodities (or futures contracts) through the exercise from the specified exercise date to the expiration date, or make the option contracts expire due to non exercise.

What is the difference between options and warrants?

Both options and warrants are options, but there are many differences:

First, the issuing subjects are different. There is no issuer of options, and every investor can become the buyer or seller of options on the premise of sufficient margin. Option trading is a transaction between different investors. Warrants are securities issued by the issuing company of the underlying securities or a third party other than the issuing company, such as securities companies, investment banks, etc.

Second, the trading methods are different. Investors can freely buy or sell options, but investors can only buy warrants or sell warrants that have been purchased, and only the issuer can sell warrants to collect royalties.

Third, the contractual supply is different. In theory, the number of options is unlimited. As long as there is a deal, an option contract will be generated. However, the supply of warrants is limited, which is determined by the issuer and is limited by the issuer's willingness, capital capacity and the number of underlying securities circulating in the market.

Fourth, the performance guarantee is different. The opening party of the option needs to pay the margin due to its obligations, which changes with the market value of the underlying securities. The issuer of the warrant guarantees performance with its assets or credit.

Fifth, the effect after exercise is different. The exercise of call option or put option is only the transfer of underlying assets between different investors. If the underlying assets are stocks, the exercise of rights does not affect the actual total circulating capital of the listed company. As for the equity warrants issued by listed companies, when investors exercise the warrants they hold, the issuer must issue new shares according to the agreed number of shares, resulting in an increase in the company's actual total circulating share capital.