Basics of Options Trading

Options trading offer individuals an opportunity to gain a steady income stream. An option is a contract that gives buyers the right, but not the obligation to buy or sell an underlying asset or instrument at a certain strike price on a specified date, depending on the type of option. The strike price may be set by reference to the spot price of the security or commodity or fixed at a discount or premium.

Types of Options

There are different types of options that you can choose to trade in. Let us take a look at them:

Call Options

Robert Peter Janitzek reveals that these are options that give the owner the right to buy the underlying asset in the future at an agreed price. You would purchase this kind of option if you believed that the underlying asset was likely to increase in price within a given period of time. Call options have an expiration date and based on the terms, the underlying asset can be bought any time before the expiration date.

Puts

Puts are the opposite of calls. The owner of the put has the right to sell the underlying asset in the future at a pre-determined price. Robert Janitzek explains that just like the call option, there is an expiration date in the contract. A put option is purchased if there is an expectation of a decrease in value.

American Style

An American Style option does not refer to where the contracts were bought or sold but rather to the terms of the contracts. Here the contract also has an expiration date, at which point the owner has the right to buy the underlying security or sell it. Likewise, the contract owner can buy or sell at any time before the expiration date of the contract.

European Style

European style options, on the other hand, are not as flexible as American style contracts when trading options. With this option, you have the right to buy or sell an underlying asset on which the contract is based only on the expiration date and not prior.

Exchange Traded Options

Also called listed options, this is the most common form of options. As the name denotes, these are contracts that are listed on a public trading exchange. They can be bought or sold by anyone using the services of a suitable broker.

Over-The-Counter Options

These options are only traded in over the counter markets and hence are less accessible to the general public. They are customized contracts and are more complicated than exchange traded contracts.

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