What is an option? An option is defined as the right to buy or sell a particular asset at a particular price on a certain date. For example, if a set of stocks/bonds is priced at $500, but the trader does not have the money yet, they will agree to an option to buy the said financial instruments at a later date. Here is a look at the basics of option trading, with advice on how to get started as an options trader.
What are Options in Financial Terms?
The option is the choice that an investor has when they are playing within the stock market. The option is a securities contract that gives them the right to buy or sell an equity, index, ETF or a particular stock during a certain time period for a pre determined price.
The key to options strategy is understanding how the price of that particular financial instrument is going to change over the next few days or weeks. For example, if two investors agree a price of $1000 for shares in a company, the future price of that product will determine which one of them will come out a winner.
Two Types of Options:
There is the call option and the put option. No matter what the trader’s end game is in terms of their options strategy, everything they do can be determined as either a call or a put. Calls are option strategies that give a trader the right to buy a stock for a specific price before the agreed deadline runs out. This strategy is normally undertaken if the trader believes the price is going to go up. For example, buying those shares for $1000 in two weeks is a sound deal if the trader believes they will be worth $1100 or $1200 by then.
In contrast, the put option refers to the option to sell a financial instrument within the time period agreed for a set price. This is the option a trader will enter into if they believe that the stock’s value is going to plummet. Agreeing an option to sell shares for $1000 is great if the shares will only be worth $800 or $900 in a week.
Each options contract is worth 1000 shares of the specified financial instrument, and it is up to the two parties to agree on how many option contracts they will be trading in their agreement.
There is always an element of risk involved with options trading. Experts like OnlineGuruTrader often warn investors about the risks of failing with their options strategy. After all, each options contract involves two parties. For every party that is taking the call option, there is another party that believes the put option is the best call.
Traders need to understand that options trading is not a quick rich scheme. There are no gimmicks or tricks to always being successful. It is about researching the market, mitigating risk, and looking to make a steady stream of profits every month.