The following article is my personal experience with liquidation. I hope it serves as a reference for everyone and encourages colleagues still fighting in the futures arena!
With the advancement of information, we often hear things like, 'End-of-term options soar by several times to attract attention.' I used to not understand this and even regarded it as miraculous, not realizing that I was falling into someone else's traffic trap.
Let's first talk about futures. Futures are financial derivatives that involve leveraged trading. If the price falls, you short; if it rises, you long. Their trading returns are linear. For example, if you buy something for 1 and it goes to 1.5, you've made a 50% profit. The same applies when shorting. This is a principle that even someone with a primary school education can understand.
Futures have main contracts, meaning you are trading contracts that expire in a few months. You need to close your position before expiration.
As for options, the returns on options are not linear; their leverage is even greater than that of futures. Similarly, if something worth 1 goes to 1.5, your option could multiply several times or go to zero. This requires you to select the right strike price.
On a deeper level, the rights and obligations of options are not equal. Influencers say that selling options is like starting an insurance company. So what about buying options? Isn't it just betting on a major accident for the insurance company to compensate you? Let's think about it; in our lives, how many insurance companies have gone bankrupt due to car insurance? None. This is a logical flaw. Essentially, when trading options, you are likely to profit as a seller, but let's discuss the seller.
However, some people still say, 'You're talking nonsense. The buyer's profit potential is unlimited, while losses are limited. The seller's profit is limited, but losses are unlimited.' It sounds reasonable. So can I apply this logic to lottery tickets or other scenarios? Lottery tickets have unlimited returns and limited losses. Same for other scenarios like insurance companies. Do you agree? If you do, then think about it carefully!
Another point is that options have expirations and time value, as well as pricing models and many Greek letters, which are all imported from the West. The harshest part is that the time value of options diminishes daily. If the underlying asset's volatility doesn't exceed the rate of time decay, your options will still drop, even if you are simultaneously trading futures and options in the same direction, making a profit on futures while losing on options!
So, anyone who claims to have made a lot of money in options, 99% of the time, they are the sellers. I can guarantee that. Those who claim that buyers make money are just speaking from a small probability. If they can multiply their investment every month, then why do we need Buffett?
Hahaha. However, when trading as a seller, the actual gross profit is very low because option sellers need to maintain margin, while buyers do not!
Finally, let me summarize the difference between futures and options with the simplest analogy. This is also covered in the 2-hour options learning material.
Futures only require you to predict the direction to make money.
Options require you not only to predict the direction but also to predict the specific price level.
It's that simple. As a beginner, start with one contract of futures. Once you can clearly see the direction and the price levels, then you can venture into options. But speaking of which, if you can predict both direction and price levels with high win rates, why not just trade futures directly?
Hehehe, you are absolutely right. Do you know what option sellers love the most? They love volatility! In a volatile market, the time value of options gradually diminishes. When it goes to zero, isn't that exactly what option sellers love? But if you're trading futures, you can manage to not lose or minimize losses in a volatile market, right?
I almost forgot to mention a liquidity issue: the trading volume of options is always smaller than that of the underlying asset. So, while some options might multiply several times, how much is the trading volume at the peak?
Okay, to summarize, if you have limited funds, start practicing with futures. Once your win rate stabilizes and you can clearly see the direction and price levels, you can use 10% of your capital to trade options. For larger positions, stick to futures.
Lastly, I don't deny that there are options buyers who do well, like Yu Hong and Teacher Yu. If you're interested, look them up yourself.
Finding your own profit model is key. For options, I suggest using a small position, treating it like a lottery ticket; that’s the most suitable approach!
