What is Options Trading?

Options trading are the trading of options contracts. Options are contracts under which purchasers get the right but not the obligation to buy or sell an asset for a specific price before a specific date. While this may sound like vague propositions, options contracts are regulated and binding contracts with strict terms and conditions.

Under a contract, the purchaser has the option to buy or sell an asset. The purchaser does not buy the asset. The purchaser buys the option to purchase an asset which is called an underlying asset in options trading terms. The seller in does not have an option to hold on to the asset. The seller is obliged to sell at the underlying asset at the agreed price when the purchaser exercises the option.

The two classes in options trading are, ‘Puts’ and ‘Calls’. When a purchaser exercises a ‘Put’ option, the purchaser has the right but not the obligation to sell an agreed quantity of the underlying asset to a seller at the agreed price called the, ‘Strike Price’.

When a purchaser exercises a ‘Call’ option, the purchaser has the right to buy the specified quantity of the underlying asset, regardless of the current market price, at the agreed price before the expiry of the contract. The seller is obliged under the options contract to sell the underlying asset at the contracted price and cannot demand the market price.

Options trading has many benefits. The main benefit in this type of trading is leverage. The purchaser can buy the underlying asset when the price of the underlying asset is high at the agreed price rather than the market price and sell the underlying asset at the market price to make a profit. The other benefit is protection. The purchaser is protected when the price of the original asset is low the purchaser will lose a specific quantity of the original asset at a fixed agreed price. By exercising a ‘put’ option, the purchaser can resell the original asset to the seller. Thus options’ trading has a built in insurance against the volatile movements of the market.

Options’ trading comes with risks and is not for everyone. Options traders run the risk of losing their entire investment in a short period of time. Options unlike assets can lose value as the date of expiration comes closer. In some cases the risks involved in options trading are caused by restrictions imposed by government regulation.

There are many misconceptions associated with options trading. It is generally believed that options trading is high risk trading. In fact options trading has inbuilt safeguards and has the lowest risk factor among trading methods. Options’ trading is a form of trading that offers reduced risks and inbuilt protection of capital. Options’ trading is for a specific period and this helps preserve the value of underlying assets and prevents the wasting of underlying assets. Options’ trading is also not an easy form of trading. Options’ trading requires the careful study of markets and taking calculated risks. Options trading is therefore not for an uninformed investor.

When an investor learns by trial and error, to capitalize on options trading, a good profit can be made through trading in options.

Leave a Reply

Your email address will not be published. Required fields are marked *