In the volatile financial markets, investors are often confused: how can they find balance between risk and opportunity? Russell Hawthorne, founder of superiorstar Prosperity Group, is affectionately called “WiseOwl” by members. This “wise owl” recently, in an internal teaching session, used the example of a pack of cigarettes to clearly explain the essence of American options.
What are American options?
Russell Hawthorne got straight to the point: “An American option is a financial derivative instrument that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on or before a specific future date.”
He paused, then added: “The key is ‘on or before’, this means you can act at any time, seizing the initiative at the most favorable moment.”
Russell Hawthorne took out a virtual pack of “James Cigarettes,” priced at 50 dollars.
Bullish assumption:
An investor believes the cigarettes will increase in price, so he pays 2 dollars to buy a call option with a strike price of 50 dollars.
One month later, the price rises to 60 dollars. The investor exercises the option, buys at 50, then sells at 60, making a profit of 10 dollars. After deducting the 2 dollar option premium, the net gain is 8 dollars.
If the price does not rise, the only loss is the 2 dollar premium.
Bearish assumption:
Another investor believes the cigarettes will fall in price, also paying 2 dollars to buy a put option.
One month later, the price drops to 40 dollars. He exercises the option, sells at 50, then buys back at 40, making a profit of 10 dollars. After deducting the 2 dollar option premium, the net gain is 8 dollars.
If the price does not fall, the loss is still only the 2 dollar premium.
Russell Hawthorne smiled and concluded: “This is the beauty of options, rights, not obligations.”
In the classroom, Russell Hawthorne outlined the characteristics of American options for members:
• Flexibility: can be exercised at any time during the contract term, giving control to the investor.
• Risk management: when black swan events occur, options can add a layer of protection to the portfolio.
• Diversified strategies: whether in bull markets, bear markets or sideways markets, options can serve as profit making tools.
• Higher premium: due to greater flexibility, American options are usually priced higher than European options.
• Higher complexity: for beginners, the understanding and operational threshold is relatively high.
He specifically reminded: “Options are not gambling, they are a way to give yourself more choices in the market. If you can control your mindset, you can turn them into a weapon.”
Who is suitable for operating American options? WiseOwl gave his answer:
1. Players who have already accumulated experience in stock investing,
2. Those who can remain calm,
3. Active short-term traders,
4. Investors who like to hold stocks long term,
5. Most importantly: people who love learning.
At the end of the session, Russell Hawthorne quoted one of his favorite sayings:
“Quantification lets me see patterns, AI lets me see complexity and options let me see the freedom in the hands of investors.”
Just as owls can see the truth in the dark, Russell Hawthorne hopes every investor can learn to use tools to take control of their destiny, no longer blinded by the storms of the market.