What is Options Trading?
Options are viewed as opportunities in the market to make buy and sell decisions, these are opportunities based on if the market takes the right course. Options trading systems attempt to capitalize on a variety of strategies.
An option is a derivative trading vehicle that establishes a contract between two parties concerning the buying or selling of an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in some specific transaction on the asset, while the seller invites the obligation to fulfill the transaction if so requested by the buyer. Hence, giving them the name; options. If a trader holds, or owns, an option, they are not required or obligated to exercise it – which means asserting the right to buy or sell.
Puts & Calls: In options contracts there are either puts or calls and a trader can buy or sell either type.
1. Calls: buying a call gives one the right to sell the underlying instrument (a specific price within a preset time period before the contract expires) from the option seller at the exercise price.
2. Puts: buying a put gives one the right to sell the underlying instrument to the seller at that price.
Selling calls means that one must be prepared to sell the underlying instrument at the exercise price, yet if a trader sells a put, he or she must be prepared to buy the underlying instrument at the exercise price. This is all apart of understanding options trading.
1. Strike Price or Exercise price: this is what is paid if the trader exercises an option to buy the underlying instrument. It is also used as the price that is received if the trader exercises the option to sell.
The process of activating an option and thereby trading the underlying at the agreed-upon price is referred to as exercising it
2. Premium: The market price of the options contract and is tied to the current market price of the underlying relationship.
Most options have an expiration date. If the option is not exercised by the expiration date, it becomes void and worthless. Options are considered sophisticated trading tools, so a trader could benefit from having knowledge and a proper options trading education pertaining to options before entering options trades.
Benefits of Trading Options
Minimal cash requirement as compared to trading the underlying stock
Higher potential for returns
Provide more strategic alternatives because they offer more alternative investments and are a flexible tool