An option is a contract between a buyer and seller that gives the buyer a choice to purchase or sell financial security; usually stocks at a given price called the ‘strike price’ at a certain point in time. An option is a prediction on the way a stock will move. Buyers are then required to pay the seller a fee called the premium. When the option expires and the stock is worth the strike price, which usually depends on the option type, it’s worth the money.
Options are interesting because of the potential to earn huge returns, though it might come at the cost of risking a significant loss. Option strategies practiced by professionals are designed with an objective to have the time factor work for them.
There are generally two outcomes for options trading, it could be worthless or profiting. If the stock doesn’t follow the buyer’s anticipated move, the option expires worthless and the buyer loses the premium and the seller keeps it. In this case, the seller’s profit is the buyer’s loss. And if things go as planned, then the difference between the strike price and the stock price is the option’s profit. Here the buyer’s profit is the seller’s loss.
Types of option trading:
Depending on the rise and fall of stocks, options are broadly classified into two types, calls and puts. Calls increase in value as the stock rises while as puts increase in value as the stock falls.
Types of option trading strategies:
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Short-selling you can profit from falling prices and the risk associated with a short-selling position is unlimited as there is theoretically no limit on how high a price can rise. If the stock rises more than the option’s strike price, the option will simply expire worthlessly with a very high upside at the cost of the premium.
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It’s better to first understand the technicalities of trading and options related to it, before putting your trading skills to the test. You can go for options trading strategies for beginners before you start risking your own money.
