There is a bottom, called “earn time money”

The most representative stock index of our A-shares is the CSI 300, which is selected by ranking the average daily turnover of the Shanghai and Shenzhen stock markets in the last year (since the IPO) from the highest to the lowest, eliminating the bottom 50% of stocks, and then ranking the remaining stocks according to the average daily market capitalization from the highest to the lowest, selecting the top 300 stocks as sample stocks.

Simply understood, these are the stocks of the best 300 listed companies in our Greater A-share market.

Since the beginning of 2022, our big A-share is very bad, the CSI 300 index has fallen so much that it is called “fallen mother does not recognize”, at the end of 2021, the CSI 300 index was still above 5,000 points, but by the end of October this year, the index has fallen to near 3,500 points, a full drop of 30%.

This drop has led to the stock-bond spread (stock earnings rate – 10-year Treasury yield) of the CSI 300 exceeding 8%, almost the highest level since the creation of the CSI 300 (it reached this level within a few days in May 2014), which also means that the current Chinese stock market is significantly undervalued.

Now, the CSI 300 has rallied about 300 points or so from its lows, from around 3500 to around 3850, and at this point in time, what should I do if I want to take a stock market plunge and I am afraid there is still a drop?

At this time, you can use options to bottom out and give yourself a thicker cushion of safety.

I’ll start with a brief introduction to options here

An option is best understood as a deposit.

You buy a house, agree on a home price of $1 million, you pay a $50,000 deposit up front, and the real estate agent receives a $50,000 deposit. By the agreed date, the price rises to $1.5 million and you make $450,000; but if the price falls below $1 million, you give up your right to buy, but the deposit is not refundable and the real estate agent makes a net profit of $50,000.

This deposit, in fact, is a call option (Call Option), the subject of this option is the house, the agreed date is the exercise date, 1 million is the exercise price, and 50,000 Yuan is the option premium.

In this option transaction, the real estate agent is selling the call option (Short Call), and you are buying the call option (Long Call), the real estate agent gets the option money, and you get the right to buy a house for $1 million (but there is no obligation to buy a house).

The counterpart to the call option is the put option.

The real estate agent wants to sell the house; he pays you $50,000 and agrees to sell you the house at $1 million on a certain date. On the agreed date, if the price drops to $500,000, he has the right to sell you the house at $1 million (because you took a deposit, so you must perform as agreed), and he makes a net profit of $450,000; if the price is higher than $1 million, he can choose not to sell the house, so you Net profit of 50,000 Yuan.

This deposit is the Put Option on the house. In this transaction, the real estate agent pays the option premium, acting as the put option buyer (Long Put), and you receive the option premium, acting as the put option seller (Short Put) – although this approach is not easy for most people to understand, but when you think about it, it is a call option with the opposite of a call option is bought and sold.

Note that for you, these are really two ways to buy a house.

One way is that you pay a deposit and have the right to buy the house at a certain price.

The other way, is that you get a deposit and someone else has the right to sell you the house at a certain price.

It sounds like the first way of buying a house is more autonomous, because you pay the deposit and have the right to buy or not buy – assuming the price does not go up or down, the 50,000 Yuan is lost for nothing, and the deposit you pay is essentially an option for a period of time, a time value, which is what the meaning of OPTION.

Because the exercise price, the exercise date, is agreed upon by the person selling the option, they will certainly choose a way to sell the option (collect the premium) that is most beneficial to them. Take this case, they will try to choose to sell the call option (make you pay the royalty) when the price of the house is high, and agrees to sell it to you in the future for 1 million when the market price is 800,000……

So, think of it the other way around, when you sell a home price put option (realtor pays a deposit), it can actually work like this.

The market price is now $800,000, and when you sell the put option, you can agree that the strike price of the house will be $500,000 –

If the market price does drop to $500,000 or even below, you buy it for $500,000.

If the market price is still above $500,000, the real estate agent will definitely not sell it to you, and you will earn the option money for nothing.

Well, now the above “house”, to replace the “stock”, replace the “CSI 300 index”, or replace it with futures commodities, or bit coin, are the same The reasoning is the same.

In the current situation of the CSI 300 index, simply put, you are particularly worried that the CSI 300 index may fall, but you should also know that the fall will not be too deep, in this case how to bottom better?

According to the house deposit principle just mentioned, the best way to bottom is to sell put options (Short Put Option).

Not to make up empty words, directly take the current transaction price to show you.

The following screenshot, taken at noon on November 15, shows the trading price of CSI 300 Index options expiring in March 2023, with the strike price in the middle, the call option on the left, and the put option on the right.

Now suppose that you are afraid that the stock market is going to fall again and you predict how far it will fall at the most extreme, then you sell a put option at that price – let’s say you think it might fall again to about 3,600, and then you sell a put option at 3,600 and get $81.20 in royalties.

That $81.20 is the time value I mentioned earlier.

By March 2023, there are only two possibilities for the CSI 300 index.

The first possibility, above or equal to 3600 points, means that the option you sold is worthless and will not be exercised, and you have earned yourself $81.2 for nothing.

The second possibility, below 3,600, means that the options you sold will be exercised, let’s say, at the most extreme, the CSI 300 index falls to 3,000, which is equivalent to going back to where it was at the end of 2018, so you would lose about $600.

The first scenario, which is what I’m talking about, is that you make at least time value when you take the bottom.

The second scenario, if it happens, you know, according to the EPS (earnings per share) of the past 12 months, from the end of 2018 to now, the corporate earnings included in the CSI 300 index, but from 189 Yuan to 334 Yuan. The end of 2018 is already one of the most undervalued time in the Chinese stock market, now, corporate earnings out 76% more, but the price is still the same as the original, that price, can be It is truly the price below the 18th floor of hell.

If you have some guts, you can sell your house and buy shares at this time, which is one of the few opportunities for ordinary people to change their fate.

However, people are always greedy. Someone said I’m not only worried about the decline; I’m also worried about the surge! If the big A-shares soar again, what about the $81 I made from selling the puts?

Well, let me show you another way.

Use the premium you get from selling puts to buy a 4200 Yuan call option at 82.4 Yuan, which is equivalent to spending 1.2 Yuan more, if the CSI 300 index really surges, as long as it is above 4200 points, you will have to earn.

Let’s say that by March 2023, if the CSI 300 index rises to 5,000 points, which is the price at the end of 2021, you’ll have earned an additional $800.

Knock on the blackboard –

I especially want to emphasize that whether it is futures or options, financial derivatives come with risk, buying options, you can lose the entire principal amount you bought, and selling options, if you exceed the quantity, you can lose the entire principal amount of all your accounts.

 

 

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