The definition is; an options contract is a financial instrument that gives its owner the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on or before a certain date. The buyer of an option pays money upfront and then hopes to earn money if their investment becomes profitable over time. The options in stock market can be purchased either before or after an underlying security is issued.
- Options Trading Strategies: These involve the purchase and sale of options contracts. The buying can be done in a single trade or multiple trades, depending on the underlying security and your trading strategy.
- An Options Contract is a type of Derivative: Options are financial instruments that derive their value from the price of an underlying asset. The most common derivative is the futures contract, which gives you exposure to a particular commodity or asset at a predetermined price on a future date. Options contracts can be traded on exchanges like stocks and futures markets.
- Features of an Option Contract: The feature of an option contract is that it provides the buyer and seller with a contractual right to buy or sell shares at a specified price for a fixed period. If you want to know more about this, then read on. The premium payment is the fee paid by one side (the buyer) when buying an option contract from another party (the seller). This amount can be calculated based on various factors like time value, volatility, and other criteria. A strike price refers to how much money you need before buying any shares if they fall below certain levels during their respective expiry dates. It’s also known as your limit price because once this level is breached during expiration day, then all options held by investors are instantly exercised into cash following their terms/conditions set forth by exchanges.
Types of Options Contracts:
- Call option: This is the right to buy a stock at a specified price within a specified period. The buyer of this contract has to pay an up-front premium and make an additional payment when they exercise their right.
- Put option: This is the right to sell a specific quantity of shares at a specified price within a specified period. The seller has to pay an up-front premium and makes another payment when they exercise their right.
- Straddle: This is similar to strangling but with different risks involved since it involves both long positions (buying) as well as short positions (selling).
- Strangle: Similar to straddle but even riskier because one can lose money from both long sides.
- Butterfly spread: A combination of two different options contracts where one goes up against the other so that you get lower risk than if you just did one or two positions separately (i.e., buying calls on top of selling puts). It’s also called “butterfly” because its shape resembles butterfly wings folded together over each other like protective shields against predators.
As a beginner, you might have difficulty understanding how to opt for option trading strategies. But with the help of this guide, you will be able to manage your investments better and make more money.