Options Trading Basics Explained
It’s simply the process of buying and selling put and call options. It can involve simple strategies like long calls or puts only. Investing with options is all about customization. Rewards can be high — but so can the risk. Trading options is a lot like trading stocks, but there are important differences. Unlike stocks, options come in two types (calls and puts) Options are contracts that give the owner the right to buy or sell an asset at a fixed price for a specific period of time. That period could be as short as a day or as long as a couple of years, depending on the type of options contract. Fortunately, there are only two types of standard option contracts: a call and a put.
A call option contract gives the owner the right to purchase 100 shares of a specified security at a specified price within a specified time frame. A put option contract gives the owner the right to sell 100 shares of a specified security at a specified price within a specified time frame. It’s important to note, for both types of options contracts— a call or put— the owner is not obligated to exercise his or her right to buy or sell. Some investors buy calls when they expect the share price to move higher. Others might sell calls when they expect the price of a stock to trade flat or move lower. A put option represents the right to sell a security at a pre-determined price (the strike price) for a specified period of time. An investor might buy a put if they expect the price of a stock to move lower or as a protective position. A put seller is obligated to buy the stock at the strike price through an expiration period. Puts and calls can be used in many ways to create different potential risks and rewards scenarios. Complex strategies like straddles, butterflies, and calendars. The option contract or the motivation for buying and selling, the orders are submitted to a brokerage firm and then the transactions take place one of the exchanges. Keep in mind, options trading is not suitable for every investor. In addition, be aware of transaction costs, especially when dealing with strategies that involve more than one contract as they can have a significant impact on any potential profits or losses.