Options are financial derivatives that give the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price, known as the strike price, within a specified time period. Options are versatile instruments used for hedging, income generation, and speculation.

Understanding Options

Options are categorized as either call options or put options. A call option gives the holder the right to buy the underlying asset, while a put option gives the holder the right to sell the underlying asset.

Option Contract Basics

An option contract specifies the terms of the options agreement, including the underlying asset, the strike price, the expiration date, and the premium. Options are traded on exchanges and over-the-counter (OTC).

Call Options

A call option gives the holder the right to buy the underlying asset at the strike price before the expiration date. Call option holders profit when the underlying asset’s price rises above the strike price

Put Options

A put option gives the holder the right to sell the underlying asset at the strike price before the expiration date. Put option holders profit when the underlying asset’s price falls below the strike price

Option Premium

The option premium is the price paid by the buyer to the seller for the right to buy or sell the underlying asset. The premium is influenced by factors such as the underlying asset’s price, volatility, time to expiration, and interest rates.

Option Exercise and Assignment

Option holders can exercise their rights before the expiration date, while option writers can be assigned an exercise at any time before expiration. Exercise and assignment result in the buyer either buying or selling the underlying asset at the strike price.

Option Trading Strategies

Options can be used to implement a variety of trading strategies, including bullish, bearish, and neutral strategies. Common strategies include buying call or put options, selling covered calls, and using spreads.

Risks of Options Trading

Options trading involves risks, including the potential loss of the entire premium paid for the option. Other risks include time decay, volatility fluctuations, and the risk of assignment.