What’s the difference between a European option and an American option?A simple example, teach you to understand options investment


What is an option? An option, named option in English, refers to the right of the buyer of an option to buy or sell a certain quantity and quality of the original asset at an agreed time and price.Unlike futures, which are also derivatives, an option is a unilateral right, and the buyer of the option can choose to exercise the option or opt out of the exercise date.Of course, in order to get the right, the buyer of the option pays the seller a premium at the beginning, which is the price of the option.Types of options Options are not a simple financial derivatives, but a huge class of derivatives.The so-called “European option” and “American option”, the main difference lies in the exercise date trading time.According to the trading time, options can be divided into European options, American options and Bermuda options.European options, which can only be exercised on the expiration date of the option;American options that can be exercised on any trading day before the option expires;A Bermuda option that can be exercised on certain agreed dates prior to the expiration of the option.According to the direction of execution, it can be divided into bullish options, put options and two-way options.A call option assumes that the price of the underlying asset will rise in the future.A put option is a belief that the price of the underlying asset will fall in the future.Two-way options, which can be independently decided on the date of execution of the execution direction is to buy or sell, generally applicable to the belief that the underlying asset price will change substantially in the future, but can not determine the direction of change.Press asset of mark, can divide for gold option, stock option, stock index option, oil option to wait a moment.In addition, there are various, difficult-to-categorize types collectively known as exotic options.Asian options, for example, take the average price over the life of the option as the strike price.Look back at the option and use the most favorable price over the life of the option as the strike price.Barrier option, the price movement of the underlying asset, must meet the agreed conditions, otherwise the option is invalid.When the option is tapped, the price of the underlying asset shall not meet the agreed conditions, or the option shall be invalid.The simple example above is too academic to understand, right?It doesn’t matter. Let’s take a simple example.Suppose the price of pork is 20 yuan per jin now, and investors think the price of pork will rise to at least 30 yuan per jin next year. What should they do?Start by buying a pork call option from the investment manager.With this option, you can at the end of next year (agreed time), from tou Shuai this at 25 yuan/jin (agreed price) to buy (operation direction) two hundred jin (agreed quantity) good fat and thin interphase (agreed quality) streak-meat (original assets).Of course, this right investor can’t want for nothing, just throw handsome 500 pieces of option fee.(For example, the pricing of real options is far more rigorous and complex than this.)If by the end of next year, pork really rises to 30 jin, investors earn 5 yuan per jin, and an option can buy 200 jin.$1,000 profit, minus the option premium of $500, $500 net.If by the end of next year, the price of pork does not rise to 30 yuan, only 24 yuan per jin, then investors will lose 1 yuan per jin.If you exercise the option as agreed, your total loss will be 200*1+500=700 yuan.But the option is a unilateral right, the investment manager as the option seller can not force investors to buy my 25 yuan a catty.At this point, the investor’s wise choice, of course, is to give up the exercise of this option, so that the loss is only the option premium of 500 paid before.Conversely, if the investors feel that the pork can not grow, they can also agree to the end of next year, at the price of 25 yuan per catty, sell to tou Shuai 200 catty, which is called “pork put option”.What about European and American options?If you make an appointment in advance, no matter what happens next year, the pork will be traded at market price on December 31, the end of the year.That is to say, even on December 30, the price of pork is 100 yuan is useless, as long as it in December 31 the market price is less than 25 yuan a catty, investors this option or a piece of paper, this is called European option.If you can trade any day of the next year, you can make a lot of money by exercising the option when the price of pork is high. This is called an American option.(option cost is more expensive is certain), of course, there are also, we make an appointment in advance of several specific dates can trade, such as the 10th of every month, investors can decide whether to exercise the right, this is called Bermuda option.To sum up, as an important financial derivative, option was designed to meet the needs of investors for hedging risks and hedging.Option only needs to pay a small amount of option premium to lock in a large number of original assets, equivalent to leverage, is a high-risk investment product.For example, in our example, the investor only paid the option fee of 500 yuan to lock in the trading volume of 200 jin of pork.But if do not use the option, trade directly in the raw meat market, the investor needs to pay 20*200=4000 yuan, can have the same effect.The same rise to 30 yuan a catty, using the return rate is 500/500=100%;In the raw meat market, the investor’s return is only 500/4000=12.5%.During his postgraduate study, tou Shuai focused on option pricing. After three years of painstaking research, he deeply felt the power and fearfulness of options.In studying options, we should focus on understanding the risks and benefits of options.We should not only see the opportunity to make a fortune in the huge fluctuation of option price, but ignore the vagaries of risk crisis behind it.

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