What is Options Trading?

Are you interested in expanding your assets and managing risks altogether? Well, irrespective of whether you are a novice or an experienced investor, listed stock and options trading is an efficient way to accomplish such objectives. Almost anyone can have access to this market due to the broad range of strategies available in this area. The main condition is to try to understand how these securities work and to apply them properly. Therefore, the purpose of this article is to answer the question “what is options trading?”

First of all, let us settle the difference between trading and investing. Time-framing is the element that separates the two, as the latter refers to an action which is carried out to meet longer term financial goals. The former designates an approach to the market that aims at obtaining superior returns to help build those longer term investments. Superior returns imply taking an additional but definitely a measured risk.

Since the focus of the article is the answer to “what is options trading?”, let us start with the notion of options itself. They are financial instruments deriving their value from another underlying asset or financial measure.

Coming in two forms – calls and putts – options allow you too benefit from both bullish and bearish moves in either underlying that you select, if you add them to your current investing and trading tools. To get a better grasp on their value, one has to understand the importance of the asset in which they are based. Depending on this parameter, the interpretation of the stock or options movement will differ. Nevertheless, one’s learning curve is geared toward applying options when comparing them to its underlying security or other securities.

Let us have a look at the main aspects to be considered when dealing with the question “what is options trading?”. Thus, you have to place the primary stress on:

  • knowing what conditions to take into consideration when analyzing a trade;
  • employing the appropriate trade mechanics when you create a position;
  • identifying trading rules and requirements for the security;
  • comprehending what makes the position gain and lose value.

The above listed items represent key components of options, helping you to pave the way towards a good platform for creating rewarding positions.

Now, the article will proceed to “deconstructing” the act of options trading. The transaction is based on concluding a listed stock option, which is a contractual agreement between two parties with standard terms. When you want to create a position, the acquisition of an option gives you rights and its sale leaves you with obligations. The rights and obligations mentioned here are guaranteed by the Option Clearing Corporation (OCC). When handling options, the primary risk that one encounters is time risk because contracts have a limited life.

A call option gains value if its underlying stock goes up, but if the move in the stock takes place too late, then the call expires worthless. Here are the rights that you have as a call owner:

  • to buy a specific quantity of the underlying stock;
  • to purchase by a certain date (expiration);
  • to buy at a specified price (called the strike price).

Opposite to a call option, a put one gains value when its stock moves down. Nevertheless, the timing issue is the same, in the sense that the move has to take place before the option contract expires. Among the rights as a put option owner is included the one to sell a specific quantity of stock by a certain date at a specified price.

If one is to answer the question “what is options trading?” in a synthetic manner, rendering the essence of it, then a skilled trader would say that it implies selecting options with expiration dates that allow time for the anticipated moves to occur. Although it may sound challenging to do so, the operation becomes easier if you learn to use some basic rules of thumb, such as exiting a position if it moves against you and reaches your pre-determined exit point.

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