Options contract allows investors to sell or buy an underlying asset or index or ETF at a predetermined time and price. The transactions are conducted at the options market. Buying an option that allows you to purchase it later and is called ‘Call Option’. Buying an option that allows you to sell it later and is called ‘Put Option’.
Options work differently than stocks as they don’t represent company ownership. Options are low risk as you can withdraw options contract anytime. The agreed price to purchase an underlying stock is called ‘strike price’. The fee paid for buying the contract is called ‘premium’. It is a percentage of underlying instruments.
Buying options actually means betting on stock price—will it increase, will it decrease or traders even apply a hedging strategy. On a trading forum, you can learn more about how to determine the strike price. Steady Options is a popular online forum that offers members a great platform to connect with worldwide traders and improve their knowledge.
Two kinds of options
- A call option is purchased, when you assume the stock price to go up before the contract expires and you can exercise the right sell at a profit.
- Put options are chosen when you feel the stock value will drop before the contract expires and you can sell at a profit.
It means you lock the prices [strike prices] at a premium and earn a profit if your prediction is right before the contract expires.
- For call contracts, a low strike price means the call option has more intrinsic value.
- For put contracts, a high strike price means the put option has more intrinsic value.
In-the-money & out-of-the-money
The options strike price gets determined on the underlying stock’s current value. For example, if the current price of BOSS is $1555, then the strike price above it is called OTM, and below is called ITM for call options. It is the opposite of put contracts. Remember, in any case, the OTM contract is worthless at expiration. You can understand it in another way – call options are bullish, while put contracts are bearish.
An option trading is influenced a lot by the underlying asset price, volatility, and options expiration timeframe. Options premium gets determined by the underlying assets’ intrinsic and time value.
Implied versus historical volatility
Volatility means how much an underlying asset’s price swings. High volatility means high risk and vice versa. Historical volatility evaluates the fluctuation of stock day-to-day over a year. Implied volatility is a rough guess of stock volatility in the future based on market movement across the option contracts timeframe.
Pros and cons of options trading
The options trading pros revolve around assumed safety. They are resistant to fluctuations in market prices, so it can help your profits in the future and current investments can increase. You can get better deals on different equities and even get help in capitalizing on the equities increasing and declining prices without directly investing them.
Trading options cons comprise of risks. The main risk revolves around market volatility and uncertainty. For example, options with high prices carry high uncertainty, so trading it is risky.
You need to research the variety of option trading strategies and gain knowledge about the common errors you need to avoid. Online forums can help you a lot!