Are you interested in trading but you’re thrown off by day trading or investing in stocks? If so, options trading might be an attractive route as it is considered to be more on the safe side. If you buy an option, you are buying the right to buy stocks at a set price before a certain date and time. Still interested? Keep reading for an overview of options trading.
Options Trading: What Is It?
Mentioned previously, if you buy an option, you are purchasing the right to buy or sell a stock at a fixed price before an expiration date. Until that day comes, those stocks are locked down and belong only to you.
Despite having the right to buy or sell these stocks, it is not required of an individual. If you purchase a stock option, you could own numerous stocks, however, you will not have any ownership or say in the company. If you are interested in options trading, there are 3 types of options you could invest in; a call option, a put option, and a binary option.
Key Terminology
Exercise: This term refers to exercising the right that you were afforded by the contract once you purchased the option.
Premium: This refers to the option’s total cost and value
Holders: Holders are the owners of options who have been given the go-ahead to sell or buy them if they choose to.
Writers: A writer is the person that sells options to the holders. Since holders have the right to ‘exercise’ their options, a writer has to stick to their end of the deal and follow through with the contract
Call Option: If an owner buys a stock at its fixed price before a certain day, then the holder is exercising their ‘call option’ right.
Put Option: This term refers to when an owner (holder) sells a stock at its set price before the option itself expires. Most people who buy put options hope that the price will fall over time. If this occurs, sell the stock at its higher set price.
Binary Option: If you own a binary option, the profits that you make will depend entirely on whether or not a certain situation occurs. Additionally, owners of binary options can not sell them.
Featured Image: Depositphotos/©scanrail
