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OPTIONS TRADING
Introduction:
Options trading is a popular financial instrument that is used by traders and investors to speculate on the price movement of various assets such as stocks, currencies, commodities, and indices. Options are derivatives, which means they derive their value from an underlying asset, but they provide the buyer with the right, but not the obligation, to buy or sell the underlying asset at a specific price on or before a specific date.
In this article, we will discuss the basics of options trading, including what options are, how they work, the different types of options, and the risks and benefits of options trading.
An option is a financial contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a specific date. The underlying asset can be anything from a stock, index, currency, or commodity.
*Options are contracts between two parties, a (buyer) and a (seller) and they are traded on an options exchange !
Options have two types:
Call options and Put options
A Call option gives the buyer the right to buy the underlying asset at a specific price, known as the strike price, on or before a specific date, known as the expiration date. A Put option, on the other hand, gives the buyer the right to sell the underlying asset at a specific price on or before a specific date.
How do Options Work?
When you buy an option, you pay a premium to the seller for the right to buy or sell the underlying asset.
The premium is the price of the option and is determined by various factors, including the current price of the underlying asset, the strike price, the expiration date, and the volatility of the underlying asset.
If you buy a Call option, you are hoping that the price of the underlying asset will go up before the expiration date. If the price does go up, you can exercise your option and buy the underlying asset at the strike price, which is lower than the current market price. You can then sell the asset in the open market for a profit.
Different Types of Options:
There are several types of options available in the market, including American options, European options, and exotic options.
American options can be exercised at any time before the expiration date, while European options can only be exercised on the expiration date. Exotic options, on the other hand, have more complex features, such as the ability to be exercised only if certain conditions are met, or the ability to be settled in cash instead of the underlying asset.
Options can also be classified based on their underlying assets, such as equity options, currency options, commodity options, and index options. Equity options are options based on individual stocks, while currency options are options based on currencies. Commodity options are options based on commodities such as gold or oil, and index options are options based on stock indices such as the S&P 500 or the Dow Jones Industrial Average.
Benefits of Options Trading:
Options trading can provide several benefits to traders and investors, including:
Leverage:
Options allow traders to control a large amount of underlying assets with a relatively small amount of capital, which means traders can potentially earn higher profits.
Hedging: Options can be used to hedge against potential losses in a portfolio. For example, if a trader holds a stock that is expected to decline in value, they can buy a Put option to protect against the potential loss.
Options are derivatives, which means they derive their value from an underlying asset, but they provide the buyer with the right, but not the obligation, to buy or sell the underlying asset at a specific price on or before a specific date.
Equity options are options based on individual stocks, while currency options are options based on currencies. Commodity options are options based on commodities such as gold or oil, and index options are options based on stock indices such as the S&P 500 or the Dow Jones Industrial Average.
Options can be used to hedge against potential losses in a portfolio. For example, if a trader holds a stock that is expected to decline in value, they can buy a Put option to protect against the potential loss.
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