Options trading have dominated the business world already with its new designs and strategies. All investors should choose the type of trading they want to use to earn big from their asset and keep on betting on the right choice. But, what do you mean exactly by options trading? From the word itself, options in trading are your choices in the stock market. There are two types of options trading. It can be a call or put options that allow you to call (buy) or put (sell) your chosen asset at a certain time and price in its expiration date.
In all types of options, there are always two parties involved, the buyer and the seller.
- Seller – for call options, they are obliged to sell their underlying asset or security. For put options, they are obliged to buy their underlying asset.
- Buyer – for the call option, they have all the right to buy their underlying asset. For put options, they have the right to sell their underlying assets.
Remember that each amount of option contracts corresponds with a hundred shares. For instance, 1 options contract is equal to 100 amounts of shares and so on. What are options contracts? There is the premium type of options contracts. Every time you buy an option contract, you have to pay for the privilege packed with it. For example, if you want to invest in Yahoo, you have to pay them of $625 per share. Buy 500 shares and that investment will be equivalent to a part of a real state. Another one is the options at the money, out of the money, in the money.
- At the money – this happens if the strike price is the same as the market price of the chosen asset.
- In the money – a call option is in the money if the strike price is below the price of the market of the underlying asset. For the put option, this happens when the strike price is above the price of the market of your underlying asset.
- Out of the money – it’s a call when the price hits above the market price. On the other hand, it’s a put when the strike price is below market.
How important is the strike price? It’s a vital part in the options trading since it’s the only variable that can contribute to the option’s pricing. Each optional stock has its different strike price and expiration dates. In short, the strike price is the most important determinant why you choose to sell or buy an asset. You base your decisions on it at a short timeframe.
When the options trading started in 1973, there islimited number of securities only that traded on the market. As it develops, option symbols also develop such as:
- Year – 17 – this character will tell you when an option will expire. It signifies the year 2012.
- Options root – AAPL – this is between one-six letters only which indicates the underlying asset or security. It symbolizes an Apple asset or stock.
- Month – 05 – this tells the month of the expiration date of your options. It signifies the month of May.
- Expiration date – 20 – this tells the date when your options will expire. To sum it up, this Apple asset will expire on May 20, 2017.