An option is an option, which is the right to buy or sell a certain number of certain underlying assets at a certain price at a certain time in the future. Option execution means that in option trading, the buyer has the right to decide to buy and sell the underlying assets at the price determined by the buyer and the seller, while the seller only passively accepts the obligation to perform. Once the buyer puts forward the execution, the seller must solve his option status by performing the contract, so the rights and obligations of the buyer and the seller are not equal. The basic assets of options include commodities, stocks, stock price indexes, futures contracts, bonds and foreign exchange.
Futures delivery is a way to settle futures contract positions at maturity, and it is also a form of mutual connection between futures and spot. Futures delivery refers to the process in which both parties to the transaction settle the outstanding futures contracts through the transfer of ownership of the underlying commodities when the futures contracts expire. Futures delivery is the guarantee for the final convergence of futures prices and spot prices, and it is also an important institutional guarantee for futures prices to be relatively fair and not easy to be manipulated. Similar to spot trading, futures delivery embodies a fair trade, that is, buyers and sellers bear equal rights and obligations and voluntarily settle in kind or cash at a fair market price.
Similarities and differences between option execution and futures delivery
As the liquidation method of option trading and futures trading, option execution and futures delivery have the same place-promoting investors' hedging transactions and hedging risks. The differences between the two are as follows: First, the exercise price (strike price) of options is fixed when the contract is generated, while the settlement price of futures delivery is constantly formed in the course of trading, which is generally the weighted average price of futures prices in the near delivery month in a period of time, which is difficult to predict. Second, the buyer has the right to choose options, and the seller can only passively accept them, that is, only the buyer has the right to choose whether to perform the contract, so for the buyer, the risks are controllable and the benefits are unlimited. On the contrary, the option seller's income (commission) is limited and the risk is uncontrollable. For futures delivery, only when both buyers and sellers have the will to settle the contract through delivery can the intention of futures delivery be achieved, thus entering the process of physical delivery or cash delivery. Third, the processing flow of the two contracts after performance is different. As a secondary derivative, option may still be a derivative asset position after performance, which can be managed by hedging. However, after delivery in future positions, the buyer and seller no longer hold derivative positions.
The implementation of commodity options and the delivery of commodity futures and their risk control
Because the liquidity of commodity futures contracts is much higher than the fairness of spot and futures prices, the subject matter of commodity options is generally commodity futures contracts. In the combination strategy of futures and options, exchanges usually charge a lower reasonable margin according to the inherent hedging nature of positions. Generally speaking, after the implementation of commodity options, both buyers and sellers will get corresponding positions in commodity futures. At this time, investors (especially institutional investors) can use their spot positions to form a risk hedging mechanism, and the camera can choose liquidation or delivery to settle future positions. Options, futures and spot are linked by exercise and delivery, and are not easily manipulated by the market.
Commodity futures adopt physical delivery, and its risk management is more complicated. First, before delivery, ensure that the seller has enough negotiable standard warehouse receipts to match its short contract, so as to ensure that the seller intends to sell and recover the payment, and at the same time ensure that the buyer has enough funds to exercise the right to purchase warehouse receipts. Second, spot transactions involve the multi-party circulation of VAT invoices. In futures delivery, it should also be confirmed in advance that the buyer and the seller are qualified as general taxpayers and can issue VAT invoices for buying and selling related commodities. Third, similar to the spot, the quality of warehouse receipts varies with factors such as brand, place of origin and storage time. According to the provisions of the futures exchange on the delivery pairing principle, the buyer may buy unexpected warehouse receipts. In the delivery risk management, it is necessary to know the delivery intention of the buyer's customers in advance and reveal the risks to the delivery customers according to the delivery system of the futures exchange.
The subject matter of commodity options is mostly commodity futures, and holding commodity futures will face the above delivery risks when it enters the delivery month. Therefore, the implementation of commodity options is generally carried out in the United States, which allows the buyer to have sufficient time to make preparations and raise funds even when commodity options and futures prices are not easy to control. The risks faced by commodity options are as follows: First, when the buyer intends to exercise the right, he needs to freeze the deposit of the corresponding future positions in advance, and the deposit of the seller's option or option futures portfolio can make up for his losses on that day. Secondly, the delivery risk of the futures contract bought by the buyer after the exercise, and the trading and delivery risk of the corresponding future positions obtained by the seller after the passive exercise are consistent with the trading and delivery risk of the underlying commodity futures.
Execution of stock index options and stock index futures and their risk control
Compared with commodity options, the execution of stock index options and the delivery of stock index futures are two relatively independent processes. The contract object of stock index futures is the spot stock price index, which is often composed of a basket of stocks according to a certain bonus ratio. In the international market, stock index delivery is generally in cash, that is, on the expiration date of futures contracts, the delivery profit and loss of buyers and sellers are directly transferred in cash. The execution of stock index options is similar, and it is divided into two modes according to the different exercise methods. Because the subject matter is also the spot stock price index, the stock index options (American) on the exercise date will be converted into stock index futures, which will be delivered or closed as the futures expiration date approaches, such as CME's small S&P 500 index futures options; Another popular method is to transfer the profit and loss directly in cash on the maturity date (European), such as CBOE Standard & Poor's 500 index option.
China's stock index futures contract adopts cash delivery, that is, the profit and loss of futures delivery between buyers and sellers are directly transferred through cash. On the maturity date of futures contracts, the margin of stock index futures (more than 15%) has been able to fully cover the profit and loss of delivery on that day according to the back test of historical data. So the delivery of stock index futures belongs to zero-risk delivery.
The subject matter of stock index option is spot stock price index. Taking the popular European exercise as an example, the exercise of stock index options on the maturity date is equivalent to the one-time delivery of stock index futures. After the stock index option is exercised, it directly enters the delivery link, and the cash flow is transferred to the buyer and the seller for profit and loss delivery. In the actual transaction, the buyer of stock index options will only exercise the exercise right when there is floating profit (that is, the profit is greater than the transaction fee), and will give up the exercise right when there is loss (including the profit is less than the transaction fee), so there is no exercise risk for the option buyer. For the seller of stock index options, only passive exercise will face the risk of loss. At this time, as long as the deposit collected from the seller can cover the possible losses of the day, the risk of exercise can be avoided. The extreme value of loss is the difference between the extreme volatility of spot index and premium. Judging from the volatility of spot index and stock index futures contract backtesting, the exercise risk can be controlled within the 95% confidence interval by adopting the conservative margin rate of 10%- 15% for option contracts.