Overview of Markets
US stock market lags Chinese market by one day (it is still Sunday in the US, markets are closed). US stock market stays in a correction mode. So, no news here. We do not attempt to buy stocks when the general market is in a correction, becasue our risk of being stopped out is significantly increased. For each of my position, we pre-define the risk by putting in a stop loss. But, we do not want our stop loss to be hit too frequently. If we kept trading in a corrective market, our stop losses would tend to be hit rather frequently. So, we stay mainly in cash to avoid this excessive whipsaw environment. We play defense!
Chinese stock market goes down HUGE today, which is not unexpected after it has gone up non-stop for so much, for so long. So, Chinese stock market is now officially in a correction/consolidation. We stop buying any new stocks as the risk of being whipsawed (i.e., losing money) is significantly higher now. We wait until the storm goes by, then we start to pick the best stocks to buy. The Chinese stock market is very like the US market in the early 1900s, in that the stocks are highly correlated. They tend to go up togehter and go down together. Which makes trading the index much easier than trading the US indices, which goes back and forth, back and forth. In other words, the Chinese indices trend much better than the US indices.
Dr. Zhu assessment: 中国股指过去半年里不停顿地涨了很多。这次修正完全是意料之中 （即，这不是网上所说的”黑天鹅“事件）。我们认为这是牛市中正常的中期调整，大市可能会盘整几个月，然后继续向上。投资者这时应该立即调整策略：
b, 收到信号后，第二天开盘即买入，从买入点，如果股票跌10%, 立马割肉止损，如果涨，抓住不放
股市里几乎所有的正确方法都违反正常人的正常心理。我的老师之一，William O'Neil，亲口对我说过，“If you are normal, you can't make money in the stock market”. (如果你是正常人，你就别指望在股市里赚钱）。
Hong Kong stock market: nothing new. The Hang Seng index remains in a big trading range, which is a terrible environment for our style of investment. So, we stay clear of this environment, waiting for a better day to get in.
So, options are coming to the Chinese market, and it is a big deal. In the previous articles in this series, we introduced the history of options, the types of options (calls and puts), and how options are priced (the Nobel-Prize winning B-S model). Now, it is time to get into details on how options can be used as a strategic investment vehicle.
Risk Profile Charts
Do you know what buying an asset such as a stock or a future looks like? To find out, we need to learn how to draw a Risk Profile Chart. This is the cornerstone on which we build far more complex options strategies, so it’s important to understand this right now.
Consider a stock XYZ Inc. You buy the stock for $25.
1 The X-axis is the stock price, with the price rising as the line moves right.
2 The Y-axis is your profit for the trade.
3 The 45° diagonal line is your risk profile for the trade. As the price of the stock (or underlying asset) rises, so does your profit in this example. So when the asset price rises to $50, you make $25 of profit:
Buying (Long) a stock risk profile (almost unlimited downside [i.e., you COULD lose all your money on this investment if the stock goes to zero], and unlimited upside)
Now that you know what buying an asset looks like, we can move straight onto what shorting an asset looks like. Shorting simply means selling something that you don’t already own. Shorting is an accepted concept in some stock markets such as the USA, but is not currently allowed in some other stock markets such as the Chinese stock market, although shorting is perfectly fine when you trade Chinese futures, including its stock index futures.
Remember that when you short you COULD lose an unlimited amount as the stock price rises (if the stock keeps going up, AND if you do not cut losses on it, i.e., instead of cutting losses short, you ride them), and your maximum profit is the shorted price. To make maximum profit from a short stock position, the stock would have to fall to zero, which is not uncommon in the stock market - it happens all the time!
Selling short (Shorting) a stock risk profile (unlimited downside and 100% upside at best [i.e., if the stock goes to zero])
Why Trade Options?
The main reason for trading options is that for a smaller amount of money you can control a large amount of stock, particularly with call options. Call options are always cheaper than the underlying asset and put options usually are. Options are generally more volatile than their underlying instruments, therefore investors get “more bang for their buck” or more action. Clearly this can lead to danger, but as you’ll see, it also can lead to more safety and security. You’ll also see that it can mean much greater flexibility in your trading and even give you the ability to make profit when you don’t know the direction in which the stock will move.
Those investors with portfolios can set up protective measures in the event of a market downturn. It is also quite possible to set up a position
whereby you can only make profit. Perhaps not a hugely exciting profit in triple digits, but a certain profit nevertheless.
In short, options give the investor added flexibility, potentially much greater gains for a given movement in the stock price, and protection against risk. On the flip side, used in the wrong way, options can lead people to serious losses. You will be learning safe strategies only and the simple rules governing those types of trade.
Risk Profile Charts for Call Options
Now, let’s look at the risk profile of a call option.
Buying (Long) an call option risk profile (limited downside and unlimited upside)
For every call that you buy, there is someone else on the other side of the trade. The seller of an option is called an option writer (another way of saying a person who shorted the call option). Logic and common sense tell us that the option seller’s risk profile must be different from that of the option buyer.
Writing (Shorting) an call option risk profile (unlimited downside and limited upside)
Most investment vehicles, such as stocks, bonds, ETFs, are linear instruments that are represented on a P/L graph as a straight line;
Options are nonlinear instruments, represented on the P/L graph as curves;
Long a call option gives you the right, but not the obligation to buy an asset at a fixed price before or on a predetermined date. Long a call gives you limited downside and unlimited upside. For this right and for the removal of the obligation (i.e., risk transfer/risk mitigation), you pay a price, which is called the premium of the call option.
The Long call P/L looks like a hockey stick. This is where our company derives its name from. We desire a long call P/L profile, with limited downside, and unlimited upside.
上一篇：Give Me Options - How Are Options Priced?
下一篇：Give Me Options - Risk Profiles of Put Options