Introduction
Options trading is a highly advantageous way to invest in the stock market. They can be used to hedge against losses, speculate on the direction of the market and even profit from predicted price movements.According to AG Morgan, the option is an agreement between two parties, one of which (the buyer) has the right but not obligation to buy or sell an asset at a specific price on or before a certain date.
Understanding the Basics of Options Trading
Options are a type of derivative. Derivatives are financial products that derive their value from an underlying asset, such as stocks or commodities. Options give the buyer the right to buy or sell an underlying asset at a specified price on or before a specified date. The seller (or writer) of an option must fulfill their obligation under the contract if it is exercised by its holder–the buyer of the option.
Options can be used to hedge risk or speculate on the price movement of an underlying asset without having to own it outright.
Why Options?
Options are a way to make money from stocks. You can use them to protect your portfolio from losses, or hedge against future events that might cause your stock prices to go down. In other words, they’re useful whether you’re buying or selling stocks!
Buying and Selling Options
Options can be bought and sold, just like stocks. This can be done either in person or online using a broker such as E*TRADE or Scottrade.
Buying an option is known as a “call” option, while selling an option is called a “put.” When you buy an option, you are paying for the right to exercise your choice at any point within its designated period (the time frame during which you have the right to exercise). If your prediction comes true within this period, then great–you’ll make money! However, if not…well…that’s why they call it gambling!
Understanding Call Options and Put Options
Call Options
Call options give you the right to buy a stock at a specific price. The buyer pays for this right, called the premium, which can be thought of as an insurance policy against losses. If you own call options and think that a particular stock’s price will rise above its current level before expiration day (the last day on which your option can be exercised), then it makes sense to exercise those rights. On the other hand, if you’re not sure whether or not your prediction will come true–or if there are other factors affecting your decision–then holding onto those rights might make more sense than exercising them immediately.
Put Options
Put options have similar characteristics but work in reverse: They give their owners (called holders) the right sell shares at a set price within a certain time frame; if they don’t use that right before expiration date passes by without exercising it first then nothing happens except losing out on any gains made from having held onto those rights all along until now!
Conclusion
We hope this article has helped you understand the basics of options trading. If you’re still confused about any of the concepts we covered or want more information on how to actually trade, check out our other articles on Options Trading!
