Options trading can be a great way to make money in the stock market, whether you are an amateur or veteran trader. The trading method ensures an investor gain exposure to the price movement of an underlying asset without purchasing that asset.
In its simplest form, options trading allows investors to choose whether or not they want to buy or sell an asset at a specific price (known as the strike price) before or at a particular date (referred to as the expiration date).
In this article, we’ll discuss what options trading is and how it works. We’ll also look at different examples of options trading strategies to help you know profitable options from various market conditions.
Table of Contents
What are options trading?
Options trading is the buying and selling of options contracts. It’s like betting on the future price of a stock, but with a little more flexibility.
The option strategies cheat sheet revolves around four structures, namely, pricing, outlook volatility, outlook profit, and potential risk.
From the structures, an option contract gives its holder the right to buy or sell an underlying asset at a specific price on or before a given date.
They’re contracts that allow you to “lock in” the price of something before you buy it—so if you think something is going to go up in value. You can buy an option for less than what it will cost when you decide to buy it. This way, if it does go up in value, you’ve already locked in your profit!
But options aren’t just for people who want to bet on whether stocks will go up or down—they are also important for all kinds of things.
Types of options
According to Forbes, options trading is a way to make money by predicting the future price of a stock, index, or other financial assets. You buy an option to speculate on whether the price will go up or down. Then, you either sell it for a profit or lose all of your investment when you exercise your option.
The main types of trading options are two, namely: call and put options.
- Call options
Call options give you the right to buy shares at a fixed price from the seller, called the “writer” or “seller.” The seller doesn’t have to do anything until the buyer decides to exercise their right by purchasing the shares at market price.
- Put options
On the other hand, put options give you the right to sell shares at a fixed price from the seller—again, called “writing” or “selling.” But, again, this sale doesn’t happen unless and until you exercise your right as a buyer by buying them at market value first (if they’re above that value).
Other types of contracts do different things; some allow you to bet on whether an index will go up or down (index options), while others allow you to bet on whether interest rates will go up or down (interest rate options).
Strategies to Employ
Options trading strategies are used to give investors more flexibility when managing their portfolios. You can use the various options trading strategies to maximize your profits;
- Directional strategies predict whether an asset’s price will increase or decrease over time.
- Volatility strategies involve making predictions about how volatile an asset’s price will be over time.
- Another strategy to use is the time decay strategy. It implies that you’re betting on how long it will take for your option to expire before it loses its value.
Options trading brings a level of excitement absent from more traditional investments. If you are new to the world of options trading, you may feel hesitant. However, options trading can be a great choice if you want to expand your horizons. You will have control over your risk and profits, giving you the opportunity to make several times what you put in.
