Options trading is a financial strategy that involves buying and selling options contracts. Options are financial derivatives that derive their value from an underlying asset, such as stocks, commodities, or indices. The two main types of options are call options and put options.
Call Options: A call option gives the holder the right, but not the obligation, to buy an underlying asset at a specified price (strike price) before or at the expiration date.
Put Options: A put option gives the holder the right, but not the obligation, to sell an underlying asset at a specified price (strike price) before or at the expiration date.
Options trading provides investors and traders with the opportunity to profit from price movements in the underlying asset without actually owning the asset. Traders can take bullish positions (buying call options) if they expect the price of the underlying asset to rise, or bearish positions (buying put options) if they expect the price to fall.
Listed below are key terms in options trading.
Strike Price: The price at which the underlying asset can be bought (for call options) or sold (for put options).
Expiration Date: The date when the option contract expires. After this date, the option is no longer valid.
Premium: The price paid for an options contract. This is the cost of buying the option.
Option Writer/Seller: The entity that sells an option. They have the obligation to fulfill the terms of the contract if the option buyer decides to exercise it.
Options trading can be complex and involves a level of risk, as the value of options can be influenced by various factors, including the price of the underlying asset, volatility, time until expiration, and interest rates. Traders often use options for speculation, hedging, or income generation, but it's important to have a good understanding of the market and the associated risks before engaging in options trading.
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