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Option trading is something I’ve been doing for approximately a year. As I’ve begun to illustrate options trades I’ve taken over the previous few months, I’ve had a number of people express interest, so this first blog article will cover some of the basics of what an option is and then the key uses of trading options.

The Basics | Option Buying

A contract between a buyer and a seller is known as an option. It allows buyers (the option’s owner or holder) to buy or sell the underlying asset at a predetermined strike price prior to or on a specific date. Traditional equities buy/sell methods may not provide investors with as many opportunities as options. These contracts are divided into two types: “calls” and “puts.” A call contract is one in which you wager that the market will increase past a certain price by a certain date, and you pay a fixed premium to the option seller to buy it. If the stock’s underlying price climbs beyond your strike price plus the premium paid, you profit x100 (each option contract control 100 shares). A put is a contract in which you wager that the market will fall below a certain price by a certain date, and you pay a fixed premium to the option seller to buy it. You profit x100 if the underlying stock goes past your strike price minus the premium paid at expiration (each option contract control 100 shares). You lose only the premium paid if the underlying price of the stock is below your strike price (for calls) or above your strike price (for puts) at the contract’s expiration.

Option Selling

Option selling is the polar opposite of option purchasing, as you may have guessed. Option selling entails selling (or writing) an option contract to an option buyer and collecting the premium. If the stock is at or below your strike price plus premium paid (for a call), you profit, and if it is at or above your strike price plus premium paid (for a put), you profit (for a sell). Option selling has a fixed return but a potentially limitless risk, and option purchasing has a fixed risk but a fixed reward.

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