Options Trading is considered complex owing to its nature of high volatility. They are often debatable options as they are overwhelming and complicated. Although if one understands the foundations or basics, it becomes easy to trade. Options are also considered assets, although you must deal with them smartly to reap unmatched advantages.
Stock Options Trading is also called derivatives. The most common types will be forwards, futures, options & swaps. In this view, a derivative is a contract formed by more than two parties to derive value from assets. Such type assets could include stocks, bonds, indices, or commodities.
Types of options contracts
In general, two types of option contracts exist: American and European. American options allow you to exercise your stocks before the date of expiry. Although, the European options can only be exercised on the expiry date. In addition, exercise here means the rights to buying and selling options contracts.
Types of Option Trading
Stock Options Trading is of two types which are call and put.
Call Options
Many experts define call options as similar to the down payment for any purchase that will make in the future. Hence, call options owners to have the right to buy assets on price at a predetermined date. You can become the owner of any stock options if you pay several premiums to the seller.
The buyers usually do it to earn high profitability, assuming the price will increase shortly. Thus, you will exercise your options only if you expect an increase else you might suffer huge losses.
Put Option
Put Options are the reverse of call options. It allows you to sell options at a predetermined date and price. In put options, your bet will be against the market condition. Thus, you will only profit if the price falls more than the agreed. Thereby, you will be interpreting negative market movements.
The main difference between call and put options is that the former is for buying while the latter is for selling. In the call option, the buyer will have the right to purchase, although the owner will be obligated to sell. Input option, Buyers have the right to sell and obligations for buying any underlying assets at a predefined date.
Strategies for option trading
Stock Options Trading can help you to reap good profits if you adopt efficient strategies.
-
One such strategy is covered calls. These have become popular as the owners earn a higher income. You must write and call options on a set price to reduce the risks.
-
Married Puts are ones when the owners want to protect against downside risks when they hold any stocks. This type of strategy is like that of insurance policies. The owner will continuously buy put options equivalent to shares purchased. Owners incur a lower loss when the stock price falls when both long put and stock are collated.
-
Bull calls are also popular amongst investors. Hence, investors will buy calls at strike prices. The stocks will be sold at high strike prices. The call options have identical expiration dates of underlying assets. This is done when a price hike is expected.
-
Bear put spread strategies are also vertical type. The owners purchase options at a high price and sell puts at lower prices. Investors will adopt this strategy when they expect a price drop in options trading.
-
Protective collars are purchasing out-of-the-money put options and writing off call options. Investors adopt this strategy when the stock is experiencing higher substantial gains. By adopting the strategy, the investors will lock the sale price, thus adopting a downside protection strategy.
-
Call Ratio Back Spread is popular owing to its simplicity. Traders make good profits when the market is high and will also earn some revenue when the market is down. In this strategy, the trader incurs lower losses and reaps higher profits. By adopting this strategy, the investor will buy two OTM call options while will sell only one ITM call option.
Conclusion
In a nutshell, Stock Option Trading refers to buying or selling of call-and-put options. These are adopted per market direction to expand profits and lower losses from trading. Call options give you the right to purchase underlying stocks, while the put option provides the right to sell.
