Published : June 15, 2020
An option trading is something that the new investors usually don’t take up as it is considered to be a bit more complicated than traditional stock trading. However, if you master the art of option trading on the basis of your knowledge and awareness, then it surely has several advantages which the traditional stock trading lacks.
Before knowing in detail about different types of options, tips, and strategies, let us first understand what an option is.
An option is a derivative contract that derives its value from an underlying asset. In the option derivatives, the owner has the right to buy and sell securities at an agreed price and at a certain time period. In an option contract, the investor has the right but not an obligation to do so.
Just like a futures contract, an option contract to helps the investors avoid the risk. The only difference is that there is no obligation to buy as in the case of the futures contract.
Since the trading has now been digitalized to a great extent, no physical documents are required at the time entering an options contract. There are some important terms related to options trading that the investors need to be aware of before investing.
Option: The investor makes the payment for the option, i.e., the right to make the desired transaction. However, there is no obligation to do so on the investor.
Derivative: As the word itself suggests, the derivative is something that derives its value from an underlying asset, which in turn determines the price of the option contract.
Agreed-upon price: Also known as the strike price, agreed-upon price, does not change over time. Even if the stock price varies, the agreed-upon price remains unaffected.
Certain time period: The time until the agreed-upon data is known as a certain time period. It is the period when the option expires. The strike price of the option can be exercised at any time until the expiration date.
The types of options contracts can be classified into two broad and important categories, including a call option and a put option.
On the other hand, a stock call option is an option contract, based on an individual stock. Though the concept of index and stock call option seems to be different, the basic principle of trading in them remains the same. The investors buy the call option when they expect the price of the index or the stock to go up.
Options trading offer a wide range of advantages which are as follows:
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