Basic options in trading refer to financial contracts that give the holder the right (but not the obligation) to buy or sell an underlying asset at a specified price (known as the strike price) before or on a predetermined date (known as the expiration date).
There are two types of basic options:
Call Option: A call option gives the holder the right to buy an underlying asset at a specified strike price before or on the expiration date.
It is profitable for the holder if the price of the underlying asset rises above the strike price.
The seller (writer) of the call option has the obligation to sell the asset if the holder decides to exercise the option.
Put Option: A put option gives the holder the right to sell an underlying asset at a specified strike price before or on the expiration date.
It is profitable for the holder if the price of the underlying asset falls below the strike price.
The seller (writer) of the put option has the obligation to buy the asset if the holder decides to exercise the option.
Here are some key terms related to options trading:
Strike Price: The price at which the underlying asset can be bought (for call options) or sold (for put options) if the option is exercised.
Expiration Date: The date at which the option contract expires. After this date, the option is no longer valid.
Premium: The price that the buyer of the option pays to the seller. This is the cost of purchasing the option.
In the Money (ITM): For call options, it means the market price of the underlying asset is above the strike price. For put options, it means the market price is below the strike price.
Out of the Money (OTM): For call options, it means the market price of the underlying asset is below the strike price. For put options, it means the market price is above the strike price.
At the Money (ATM): It refers to a situation where the market price of the underlying asset is very close to the strike price.
Assignment: When the holder of an option chooses to exercise their right to buy or sell the underlying asset.
Option Chain: A list of all available options contracts for a particular underlying asset, showing their strike prices and expiration dates.
American Options: These can be exercised at any time before or on the expiration date.
European Options: These can only be exercised on the expiration date itself.
Options can be used for various trading and investment strategies, including hedging, speculation, and income generation. However, it’s important to note that options trading carries a higher level of risk and complexity compared to buying and selling stocks directly. It’s recommended to thoroughly understand the mechanics of options and consider seeking advice from a financial advisor before engaging in options trading.
