Option trading is a type of trading strategy that involves the buying and selling of options contracts, which are financial instruments that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price and time.
There are two types of options contracts: calls and puts. A call option gives the buyer the right to buy an underlying asset at a specified price, while a put option gives the buyer the right to sell an underlying asset at a specified price.
Option trading is a popular strategy used by traders and investors to manage risk, generate income, and speculate on market movements. Here are some key concepts to understand in option trading:
- Strike price: The strike price is the price at which the buyer of the option can buy or sell the underlying asset.
- Expiration date: The expiration date is the date at which the option contract expires and the buyer loses the right to buy or sell the underlying asset.
- Premium: The premium is the price paid by the buyer of the option to the seller (also known as the writer) for the right to buy or sell the underlying asset.
- In the money (ITM): An option is considered to be “in the money” if it would be profitable for the buyer to exercise the option.
- Out of the money (OTM): An option is considered to be “out of the money” if it would not be profitable for the buyer to exercise the option.
- Time decay: Options contracts lose value over time, which is known as time decay. This means that options become less valuable the closer they get to their expiration date.
Option trading involves significant risks and should only be undertaken by experienced traders who fully understand the risks involved. It is important to conduct thorough research and analysis before making any option trading decisions, and to have a clear understanding of the potential rewards and risks associated with each trade