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What are Options Trading?

Options Trading

Before you can begin options trading, you will need to know all that you are able to learn about options trading. What is it? What can it do for you? The different types of options. All of these are important to know so that you can make an informed decision on if this trading option is what is best for you.

When looking at options trading, it is essentially the contract that allows the buyer to have the ability to be able to buy or even sell the underlying asset. However, it has to be sold at a particular price and needs to be sold before a certain date. Options are a binding contract that comes with clearly defined terms and properties.

For example, while searching the housing market for a house for your growing family, you come across one that is going to be perfect not only for the kids that you already have but the one that is on the way. However, you do not have the cash at the present moment to be able to purchase it; but you will within the months that follow. While talking to the homeowner, you are able to work out a deal where you will have the choice of buying the house in that time period at a price of $150,000. The owner will then agree to offer you the option of the extended pay, but, in order to keep this option, you must first put down a payment of $5,000 so that they know that you are serious.

When you are looking at this example, there are two points that need to take away from it.

One: when you buy an option, you will have the right to continue with the purchase, but are not going to be obligated to continue with it. If you decide to let the expiration date pass by without making an effort to keep to the agreement that was made, then you will end up losing all of what you invested.

Two: the option is simply a contract that will deal with any underlying assets. Because of this, options are called derivatives. This means that the option is deriving value from another place. In the example, our underlying asset was the house, but, a majority of the time the underlying asset is stock.

The types of options that you are going to find are called calls and puts.

A call is when the holder has the ability to buy an asset for a specified price in a given period of time. The calls are similar to the long position in stock trading when you are buying calls; you are going to hope that the stock will end up increasing before your option expires.

A put gives the owner the ability to sell off their asset for a particular price in the specific time period that they are given. When looking at stock, this is like having a short position. The buyer of a put is going to hope that the price will end up falling before the option expires.

As we’ve already explained, there are two types of options. But, there are four different participants in the options market. There are the buyers and sellers of calls as well as the buyers and sellers of puts.

When you are buying an option, you are considered to be a holder; but if you are selling the options, then you are considered to be a writer. If you are a buyer, you are going to have a long position while the seller is going to have a short position.

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