What is options trading?

By Anonymous 3 years ago
100% Upvoted
IlseM4n IlseM4n Elite 3 years ago
There are only two kinds of options: “put” options and “call” options.
Call options
When you buy a call option, you’re buying the right to purchase from the seller of a particular stock at a predetermined price, which is called the “strike price.” You have to exercise your call by a certain date or it expires. To purchase a call option, you pay the seller of the call a fee, known as a “premium.” When you hold a call option, you hope the market price of the stock associated with it will increase in the near future. Why? If the stock price increases enough to exceed the strike price, you can exercise your call and buy that stock from the call’s seller at the strike price, or in other words, at a price below the stock’s market value. Then you can either keep the shares or sell them for a profit. But what happens if the price of the stock goes down, rather than up? You let the call option expire and your loss is limited to the cost of the premium.
Put options
When you buy a put option, you’re buying the right to force the person who sells you the put to purchase shares of a particular stock from you at the strike price. When you hold put options, you want the stock price to drop below the strike price. If it does, the seller of the put will have to buy shares from you at the strike price, which will be higher than the market price. Because you can force the seller of the option to buy your shares at a price above market value, the put option is like an insurance policy against your shares losing too much value. If the market price instead goes up rather than down, your shares will have increased in value and you can simply let the option expire because all you’ll lose is the cost of the premium you paid for the put.

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