A privilege, sold by one party to another, that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed-upon price within a certain period or on a specific date.
Nowadays, many traders’ portfolios include trades such as equity cash, futures and index. But the variety of securities you have at your disposal does not end there. Another type of security, called an option, presents a world of opportunity to sophisticated investors.
The power of options lies in their versatility. They enable you to adapt or adjust your position according to any situation that arises. Options can be as speculative or as conservative as you want. This means you can do everything from protecting a position from a decline to outright betting on the movement of a market or index.
This versatility, however, does not come without its costs. Options are complex securities and can be risky. Options involve risks and are not suitable for everyone. Option trading can be speculative in nature and carry substantial risk of loss. Only trade or invest with expert advice.
The two types of options are CALLS and PUTS:
A call gives the holder the right to buy an asset at a certain price within a specific period of time. Calls are similar to having a long position on a stock. Buyers of calls hope that the stock will increase substantially before the option expires.
A put gives the holder the right to sell an asset at a certain price within a specific period of time. Puts are very similar to having a short position on a stock. Buyers of puts hope that the price of the stock will fall before the option expires.
Participants in the Options Market
There are four types of participants in options markets depending on the position they take:
People who buy options are called holders and those who sell options are called writers; furthermore, buyers are said to have long positions, and sellers are said to have short positions.
Here is the important distinction between buyers and sellers:
Call holders and put holders (buyers) are not obligated to buy or sell. They have the choice to exercise their rights if they choose.
Call writers and put writers (sellers), however, are obligated to buy or sell. This means that a seller may be required to make good on a promise to buy or sell.
Don't worry if this seems confusing - it is. For this reason we are going to look at options from the point of view of the trader. Selling options is more complicated and can be even riskier. At this point, it is sufficient to understand that there are two sides of an options contract.
The price at which an underlying stock can be purchased or sold is called the strike price. This is the price a stock price must go above (for calls) or go below (for puts) before a position can be exercised for a profit. All of this must occur before the expiration date. These have fixed strike prices and expiration dates. Each listed option represents fixed numbers of shares of company stock (known as a contract).
For call options, the option is said to be in-the-money if the share price is above the strike price.
A put option is in-the-money when the share price is below the strike price. The amount by which an option is in-the-money is referred to as intrinsic value.
The total cost (the price) of an option is called the premium. This price is determined by factors including the stock price, strike price, time remaining until expiration (time value) and volatility. Because of all these factors, determining the premium of an option is complicated and beyond the scope of every traders.
These fluctuations can be explained by intrinsic value and time value. Basically, an option's premium is its intrinsic value + time value. Remember, intrinsic value is the amount in-the-money, which, for a call option, means that the price of the stock equals the strike price. Time value represents the possibility of the option increasing in value.
We designed the services which protect your capital and provide decent profit on each trade.