Options trading facilitates diversification as it allows you to buy and sell all kinds of assets like stocks, ETFs, etc. Options trading is a little more complex than stock trading and comes with greater risk. Options can help you in making larger profits if the price of the security goes up. It happens because you don’t have to pay the full price for the security in an options contract. Similarly, options trading can also reduce your losses if the price of the security goes down. This concept is called hedging.
FIA released new data for the first half of 2021 that shows global futures and options trading reached 28.9 billion contracts in the first half of 2021, up 32.1% compared to the first half of 2020. (Source:- www.fia.org)
Key Types & Terminology used in Options Trading:-
- Type- It refers to the type of option involved, i.e., call or put.
- Premium- It refers to the price that the option buyer pays to the option seller.
- Expiry Date- The date specified in an option contract is called the expiry date or the exercise date.
- Strike Price- The price at which the contract is entered is called the strike price or the exercise price.
- American Option- The option that can be exercised at any date until the expiry date is called American Option.
- European Option- The option that can be exercised only on the expiry date is called European Option.
Participants in Options Trading:-
- Buyer of an Option- The one who buys the right to exercise his option on the seller by paying the premium is called the buyer of an option.
- Writer or Seller of an Option- The one who receives the premium of an option and is obliged to sell/buy the asset if the buyer of the option exercises it is called the writer or seller of an option.
- Call Option- An option that provides the holder the right but not the obligation to buy an asset at a set price before a certain date is called the call option.
- Put Option- An option that gives the holder the right but not an obligation to sell an asset at a set price before a certain date is called the put option.
Features of Options Trading:-
- Options trade on different underlying securities.
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Options trading deals with taking calculated risks
- Options traders use the Greek alphabet to reference how options prices are expected to change in the market
- Trading options can add diversification to your portfolio along with the potential for higher returns.
Various strategies of Options Trading
- Long call options trading strategy
- Short call options trading strategy
- Long put options trading strategy
- Short put options trading strategy
- Long straddle options trading strategy
- Short straddle options trading strategy
Pricing of Options
The pricing of Options is calculated using different models. Options trading price is dependent on two things: Intrinsic value and time value.
An option’s intrinsic value reflects its profit potential, based on the difference between the strike price and the asset’s current price. Time value is used to measure how volatility can affect an underlying asset’s price up to the expiration date. The stock price and strike price affect the intrinsic value while the expiration date can affect the time value.
Now that you are well aware of various aspects of options trading and the best options trading strategies, connect with mastertrust for the best advice on options trading.
While you may feel eager to jump on the options part, you will need a lot of expert recommendations before you take the plunge. mastertrust is at your service with the best tools, guides, ance, and knowledge that you will need for options trading.