What is Options Trading ? : An options trading is a contract where the buyer has right but not obligation to buy or sell an instrument at a specific price within a specific period. The specified price is the “strike price”. It is set according to the market price.
When most of the investors think about investment, many are not aware of options trading. Hence, here is a brief overview of options trading. The concept of options trading is to buy and hold a strategy that helps you increase your money. Option s trading is a long term gain and does provide much from short term gain viewpoint.
What is Options Trading – Call and Put Options
Options are still puzzles to many investors. The explanation of call options and put options will make the things clear to you.
There are two types of options: ( CE & PE )
- A call option (CE) is to buy a stock on or before a specific date at a specific price. These are quite similar to security deposits. Call options go up in value when the value of underlying instrument goes up. The price you pay for a call option is known as option premium.
- Put options (PE) are opposite to the call options. They are to sell a stock on or before a specific date. They can be considered quite similar to your insurance policies. The put options gain value with the increase of underlying instrument’s value. By fixing a selling price in put options, you insure your stock. If the price of the stock goes down, you can exercise your option to sell it at the safe insured price.
Buyer must pay option premium price to obtain these rights.
European Style | American Style Option
Options can also be segmented into two types as per expiration. There are European style and American style option.
- The European style is exercised before the expiration date.
- An American option is exercised at any time after you purchase it.
Most of the stock options today are American style. But many index options are also European style. Whenever you purchase an index option, make sure to check which style it is.
What are Options Premiums
The price of the option is the options premium. The purchaser pays the premium while buying the option. Generally, the equity option premium or price is per share. And most options listed covers 100 shares of stock. Hence, multiply the premium 100 times. If the option premium is Rs. 3, the option will cost Rs. 300/-
Strike Price in Options Trading
The strike price is also called an exercise price. It is the price at which the seller/buyer will sell/buy the underlying security. The strike price is specified in the option contract. It will apply as per the contract at the time or transaction.
Expiration of Options
The options have a validity period. The option contract also mentions an expiration date. It is the date on which the option expires. After the date, it no longer remains valid. For all stock options in the US, the expiration is fixed on every third Friday of May month. In India every month last Thursday .
How to Exercise Options
When you buy an option, you get a right to exercise it. In the case of a call exercise, you buy the stock at the strike price. While in the case of put exercise, you sell stock at the strike price. Though you have right, it is not an obligation to buy or sell. You just have an option to exercise your right. This means you may or may not exercise your right as per your wish.
Options trading involve many other factors you should understand. We hope that you like our article of ” What is Options Trading “. Keep following our blog to learn more.