Definition: What is Options Trading?
Options trading is defined as a type of trading that is based on contracts.
These contracts give an “Option” buyer the right, but not the obligation to execute a trade.
Options trading can be quite risky, but also quite beneficial in volatile markets.
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An options contract allows you to purchase or sell an underlying asset at a pre-specified price during a pre-determined period of time.
If the time expires and you don’t execute your right, the option becomes worthless.
Types of Options
There are two types of options – call and put.
As a holder of a call option, you have the right to buy the underlying asset at a pre-specified price (called a strike price), regardless of the actual market price of the asset.
If you hold a put option, you have the right to sell the underlying asset at a pre-specified price regardless of the actual market price at that time.
All of this has to be done before the option’s expiration date.
If you’re the holder of an option, you’re not obligated to execute the deal.
Writing Options
Any investor can sell (or write) Options, as long as you have a brokerage account. If you write an Option, you are obligated to execute the deal if the other side decides to exercise their right.
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Properly predicting the market movements can be the difference between a really nice profit gain and a huge loss.
As an Option writer, you have a lot less control over the process.
Conclusion – Benefits and Risks to Options Trading
As you can see, options trading can be quite beneficial if you know the market well and make the right predictions.
However, it can be also quite risky since there are often unforeseen consequences and hidden factors. This is but a basic overview of the process.
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