In its most basic form, trading options offers the right to buy or sell an asset at a specified price by a certain date. Options can be used for speculation, hedging, or producing income. Options can offer leverage while capping your maximum loss exposure. When buying an option you can only lose the premium you paid for it (plus any commissions and fees), which is generally only a fraction of what it would cost to be long or short the underlying market. While there is potential for profit with trading options, traders should also carefully consider the potential for risk of loss associated with options trading.
There are two types of options, “calls” and “puts”. A long “call” is used for bullish trades, while a long “put” is used for bearish trades. A call option gives the buyer the right to buy an asset at a specific price, known as the “strike price”, on or before the expiration date. A put gives the buyer the right to sell or short an asset at a specific price (“strike price”) on or before the expiration date. The expiration date is simply the date at which the option expires.
In the Money
You should also know what it means when an option is “in-the-money”, “at-the-money”, and “out-of-the-money”. For a call, if the price of the stock is above the strike price, then the option is considered “in-the-money” and if it is below the strike price then it is said to be “out-of-the-money”. For a put, it is vice versa – above the strike price is “out-of-the-money” and below the strike is “in-the-money”. “At-the-money” options mean the strike price is at or very near the market price.
Having a working knowledge of the “Greeks” is important for understanding how options prices move
