Investor That Can See The Future

Chapter 16

“I got it well, so I’ll tell you. Both futures and options are derivatives. Do you know the difference between the two?”

“Roughly.”

Senior Sangyeop drank Coke and explained.

“A futures is a promise to each other to trade for a certain commodity at a certain price at a certain time in the future.”

The reason why it is necessary to set the price and date at the present time to trade something that can be traded in the future is because the product price is not constant.

If the price falls in the future, the seller loses and the buyer gains. Conversely, when the price rises, the seller gains and the buyer loses.

So, both sellers and buyers trade first at a specific point in time and at a specific price in order to avoid large losses and obtain an appropriate level of profit.

Therefore, the more volatile the commodity, the more active the futures trading. Stocks and oil are prime examples.

“The concept of options is similar. The difference is that futures are traded in the present moment, while options only sell the right to trade.”

Options have expiration dates.

A call option is the right to buy a product at a fixed price on the expiration date, and a put option is the right to sell it.

“Futures have already been traded regardless of future price fluctuations. I can’t bite because However, options may or may not be traded depending on the price movement on the expiration date.”

It is entirely up to the buyer whether to exercise the right or not. At the maturity date, the buyer exercises the right for a gain and not for a loss.

Therefore, the more feasible the option, the higher the issue price, and the lower the realization possibility, the cheaper the issue price.

“When securities companies or fund companies issue options, financial experts use all sorts of formulas to calculate the probability and rate of return. If you do it wrong, you can incur huge losses. One of the interesting things about options is that the gain of the option buyer is infinite and the loss is limited to the purchase price. But while the gain of the option issuer is limited to the selling price, the loss is infinite.”

For example, suppose a stock has a put option that can be sold for 1 million won on the expiration date when the stock is 2 million won.

Naturally, the share price is unlikely to be cut in half, and the put option is unlikely to be exercised.

As a result, the option issue price is incredibly low.

However, on the expiration date, the stock price reached 250,000 won.

If you sell it in the market, you can sell it for 2.5 million won, but there is no crazy person who dares to exercise a put option and sell it for 1 million won.

Accordingly, the option buyer waives the exercise of his/her right. At this time, the buyer’s loss is limited to the already paid option purchase price, and the issuer gains the same amount.

Now consider the opposite case.

What if a nonsensical situation happened and the stock price reached 100,000 won on the expiry date?

When sold in the market, it is 100,000 won per share, but the option buyer can exercise the right to sell for 1 million won.

It can make a profit of 900,000 won per share.

Naturally, the option buyer exercises his/her right, and the issuer must accept the exercise of that right.

In this case, you might think that it is easy to pay only 900,000 won per share, but what if the issue price of this option was 100 won?

From the publisher’s point of view, it means that you have to pay 100 won and 9000 times the selling right. If the buyer bought this option worth 100 million won, the amount he had to pay would be 900 billion won.

Of course, this seldom happens.

However······.

Sangyeop said with a bitter smile.

“Good things don’t happen, but bad things do happen. 9/11 or the bankruptcy of Lehman Brothers.”

Once that happens, the put option price jumps hundreds of times in an instant, and the option issuer has to pay that amount.

At the time of the financial crisis, global IBs, which were considered to be the best, suffered astronomical losses due to their issued derivatives, and had to go bankrupt or request financial support from the government one after another.

“What if the issuer goes bankrupt?”

“I bought insurance in case of a landslide, but what would happen if the insurance company was the first to be buried when a landslide broke out?”

If the payer goes bankrupt, there is no way to get it.

There are various regulations and margin systems to prevent such a situation, but there is no answer when the worst situation occurs.

“But whether such a thing really happens once every few years or not, most of the investment trusts and brokerage firms end up scouring the ants’ noses.”

After the brief explanation, stories that only those who have tried options can understand followed. I listened carefully and checked the important parts in my head.

Also, meeting in person and listening to explanations, it feels like things that I only knew theoretically are being sorted out.

When Sangyeop had finished talking, he looked at me and asked.

“I would like to tell them not to use options if possible, but what exactly are you trying to do?”

I thought I’d give it a go, but I decided to just be honest. It was because I was obsessed with lying in the position of receiving help.

“This is Seoseong Electronics.”

“Is it Cole or Put?”

“Foot.”

Senior Sangyeop made a surprised expression.

“Why? It’s been going well since the L6 was released.”

“That L6 will be discontinued.”

“What?”

I told him about the explosion of the phone that Taek-gyu had bought and the case of the explosion that was posted on the Internet.

Senior Sangyeop asked as if he did not understand.

“Is it just for that? Any other reasons?”

Of course there is.

I just can’t explain it here.

“I was just wondering if it would be discontinued if explosions continued. This is not accurate information.”

Senior Sangyeop gave advice with a worried expression.

“be careful. If you choose the wrong option, you will be hooked in one shot like me.”

“Yeah.”

We left the restaurant, said goodbye, and parted.

As Sangyeop senior went first, we got into the car.

I asked Taek-gyu.

“Did you hear that? You say you’re going to be hooked in one room, do you still want to?”

Taek-gyu nodded his head and looked at me.

“Sure. How about you?”

I chuckled.

“Let’s try it.”

* * *

Investing and speculating are completely different.

Investing with an acceptable risk is called investing, and with an unmanageable risk it is called speculation.

But this is just a single sheet of paper.

The same behavior can be an investment for some and a speculation for others.

Buying a wasteland with debt you can’t afford is speculation.

But what if you know about urban development plans? So, what if you know that a new city will be built on a blank slate?

We are in a similar situation.

No one knows whether the stock price of Seosung Electronics will rise or fall tomorrow. However, we do know that the L6 will be discontinued.

It’s not a wish for luck, it’s an investment, not a speculation, if you’re sure.

Taek-gyu kept things simple.

“Isn’t it an investment if I do it and speculation if others do it?”

I nodded.

“That’s right.”

Everyone opposes real estate speculation, but I don’t think that buying a house is an investment speculation.

I was thinking about how to invest.

The easiest way is to short sell. The expected return is about 20%. Even if things go wrong, losses will be limited to a few tens of percent. But the profits are limited there.

On the other hand, buying a put option will yield several to tens of times returns if the forecast is correct. But in the worst case, you will lose all your investment.

“Is it low risk low return, high risk high return?”

The lower the risk, the lower the return, and the higher the risk, the higher the return.

After thinking for a while, I came to a conclusion.

“Buy about 70 percent of the put option and short the rest.”

Even if the rate of return was slightly reduced, the worst case had to be avoided.

* * *

The stock price of Seosung Electronics, which stayed in the late 1.4 million won level, soared sharply after the release of the L6, and has now risen to the 1.6 million won level.

This is because the L6 was evaluated to be superior to the N-Phone in both design and performance, and it recorded sales of more than 40 percent compared to its predecessor in the global market.

It was predicted that the next quarter would deliver an all-time high, and securities companies rushed to raise their target price.

In fact, stock prices often move differently than expected. This is because it reflects future values ​​rather than present values.

In other words, the current share price of Seosung Electronics was already determined by reflecting future profits from L6.

But what if the L6 is discontinued?

Both present and future profits are lost.

Since the L6 was released, it has risen more than 10%, so it will definitely drop by this amount. Considering the loss due to the refund, wouldn’t it be at least 20% lower than the current share price?

Taek-gyu, who was looking at the internet site, said.

“It blew up again.”

“look.”

This time, it was the United States, not Korea. Moreover, the problem was even worse in that it was not charging.

Seosung Electronics said that it would collect it and investigate it, and stated that all the explosions so far were due to external shocks, and that this time it will be the same.

As the explosions continued not only in Korea but also abroad, foreign media also began to take an interest.

Now there was little time left.

* * *

Until just a few years ago, Korea was the world’s largest derivatives trading volume.

Although it is not so much now, it still boasted an overwhelming number one position in terms of transaction volume compared to the market size.

The average daily option trading amount alone is 500 billion won, and the futures trading amount is over 1 trillion won.

At this point, it is hard to know whether it is the stock market or a gambling board.

Even now, in the futures and options market, the battle between those who want to turn their lives around in one shot and issuers who want to scrape off blind money is fiercely unfolding.

I sat in front of the computer on behalf of Taek-gyu and logged into the home trading program.

The strike price of put options varied. The higher the strike price, the higher the issuance price, and the lower the strike price, the lower the issuance price.

Of the 13.8 billion in the account, 800 million is my money.(Read more @ wuxiax.com)

Taek-gyu said that he would pay all the investment by himself, but since we decided to invest together, I have to show a lot of determination.

So I decided to pour my 800 million won together.

Tap!

I tapped the keyboard and bought the Suseong Electronics put option.

Whatever the strike price, if the stock doesn’t drop as expected, all of these options will be a piece of paper.

I don’t know if this is a good thing.

I shook off my doubts and continued to tap the keyboard. However, while purchasing, an unexpected problem arose.

“This is not in stock.”

Derivatives are usually issued using an index such as the KOSPI200 or HSCEI as an underlying asset, but options issued using stocks as an underlying asset were limited.

By the way, since it’s about Suseong Electronics, there are many options issued, but there aren’t many options that fit our conditions.

I clicked my tongue.

“I didn’t think of this.”

It was something that Sangyeop senior didn’t even tell me.

When you think about it, it made sense. Sangyeop would have thought that our funds would be in the range of several thousand to 100 million at best.

I would never have imagined that she would have 13.8 billion.

Currently, Seosung Electronics accounts for 19% of the exchange. One particular company accounts for close to 20% of the exchange’s market capitalization.

Even if Korea has achieved rapid growth centered on conglomerates, its market capitalization of over 250 trillion is a surprising level.

Theoretically, if Seoseong Electronics falls by 10%, the KOSPI will fall by 2%.

“If it goes down 20 percent, will it go down 4 percent?”

As the weight is large, the discontinuation of the L6 will bring a shock not only to Seosung Electronics, but also to the entire stock market.

I also bought the KOSPI200 put option. Fortunately, options issued with the KOSPI 200 as an underlying asset overflowed the market.

Tiling Tiling!

The contract continued with a notification sound. The option balance increased as the cash balance decreased.

Of the 13.8 billion won, 13 billion won was poured into buying and selling put options. The cash balance in the account was only 800 million won.

“Why not buy more?”

“Eight hundred million to cover your living expenses.”

Even if the worst happens, 800 million won will not interfere with living for a while.

Now it’s too late to turn around.

All that remains is to wait for the results.