In this guide, we will discuss the basics of options. This is an important topic for anyone looking to get started in the markets. While options can be complex, with a little bit of education you can be on your way to profiting from this unique investment vehicle. We’ll cover everything from what options are to how they are priced, and finally how you can make money trading them. So whether you’re just getting started or you’re looking for a refresher, read on for all the essentials on options trading!
What are Options
An option is a contract between two parties that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price within a certain period of time. The buyer of the option pays a premium to the seller for this right.
Options are derivative contracts, which means their value is derived from an underlying asset. The most common underlying assets include stocks, commodities, currencies, and interest rates.
Options can be used in a variety of ways, such as hedging risk, generating income, and speculating on future price movements of an underlying asset.
Basic Terminology
The strike price is the price at which the holder of the option can buy or sell the underlying asset.
The expiration date is the date on which the option expires and becomes worthless.
A call option gives the holder the right to buy an underlying asset, while a put option gives them the right to sell an asset.
Volume is the amount of contracts traded through the exchanges while Open Interest is the amount of options held through settlement overnight. (Think day trades vs holding a position.)
How Options Work
When you buy a call option, you are buying the right to buy an underlying asset at a certain price within a certain period of time. If you think the price of an asset will go up, then buying a call option is a way to bet on that price movement.
Conversely, when you buy a put option, you are buying the right to sell an underlying asset at a certain price within a certain period of time. If you think the price of an asset will go down, then buying a put option is a way to bet on that price movement.
Benefits and Risks
One of the main benefits of trading options is that they offer investors limited risk and flexibility when compared to other investment vehicles.
Options also allow investors to speculate on the future direction of an underlying asset without having to own it outright.
However, options also come with some risks. One of the biggest risks is that options can expire worthless if the underlying asset doesn’t move in the price direction you had anticipated.
Another risk to consider is that options are a leveraged investment, which means they can magnify both gains and losses.
If you’re thinking about trading options, it’s important to understand both the potential benefits and risks before getting started.
Wrapping it Up
This has been a great introduction to Options and Options trading. We will continue to expand on this in future articles.
Also keep an eye out for our guide on Options trading to be released later this year!
