Options trading gives the investor options to diversify their portfolio and investing game. While options trading is more complex than any other form of investment, if done in the right way, it can generate unwatchable income for the investor. This section will walk you through the bits and pieces of options trading and will uncover a beginner’s guide on what is options trading.
Options are contracts that enable the investors to buy and sell various assets such as security or ETFs, but it is not mandatory to do so. Though the investor can buy or sell the option after the expiration date, it is up to the individual investor’s decision. They can always ignore the contract and as a result, they would only lose the premium money that they lost while opting for options trading.
What Is Options Trading – Its Types
If you are new to the bandwagon of options trading, it becomes important to introduce yourself to the various types and terms of options trading. Generally, there are two types of options trading that rule the economy.
1. Call Options
In a general sense, call options trading allows the investor to purchase shares of a stock or a commodity, at a pre-specified value over a pre-specified time. An investor should spend their money on buying the shares according to their belief that the stock price is going to increase in the near future. They can later sell the share when the prices go high, by just investing in the predetermined price.
2. Put Options
Put options are the total opposite of call options. Put options are a contract that permits the investor to sell shares of a certain commodity, generally 100 over a fixed amount of time at a pretty determined price.
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Examples On Call Options And Put Options
1. Call Options
Consider the strike price of a call option is $25. He buys 100 shares of the commodity. He pays $150 as a premium. After the expiration date is over, the share of the commodity is trading for $35 per share.
Now, the buyer has the right to exercise his purchase of the share at $25 per share. After buying, he sells the share at $35 per share.
Calculating his benefits:
He pays $2500 and sells it for $3500 per share. He also paid $150 as a premium. Thus, his net return is $850, which is quite high for his investment of $150.
2. Put Options
Consider that a company’s share will decrease to $100 per share in the near future. Now, you paid a premium of $5 and earned a contract that allows you to sell the share till the expiration date at $100 per share for 100 shares.
Now, if according to your calculations, the value decreases, you can exercise your put option and sell the share at $100 per share for 100 shares, giving you a return of $1500.
Few Final Words
While answering questions on what is options trading, we have come across a few advantages and disadvantages of the same. While options trading yields higher returns than the classical investment format, it can also result in the investors losing more money than their invested capital. Additionally, there are various options trading strategies such as long call, covered call, etc, which makes it tough for beginners investors to invest and earn high returns from options trading. But, this should not discourage the investors from walking away from the options trading sphere.
It is important to research the market and diversify your knowledge before committing to any decision. If done properly and with sound knowledge, options trading can earn you more returns than regular stock trading.
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