Basics of Option Trading

Option trading is a type of investment strategy in which an investor buys or sells the right, but not the obligation, to buy or sell a specific underlying asset at a specific price and at a specific time. The underlying asset can be a stock, commodity, or currency. The right to buy is known as a call option, while the right to sell is known as a put option.

 Basic terms to know when trading options:

 Strike Price: The price at which the underlying asset can be bought or sold.

 Premium: The price of an option, which is paid by the buyer to the seller.

 Expiration Date: The date on which the option contract expires.

 Underlying Asset: The asset that the option is based on, such as a stock, commodity, or currency.

 Volatility : The degree of price fluctuation of the underlying asset, which affects the value of options.

There are two types of options:

 Call Option: Gives the buyer the right to buy the underlying asset at a specified price.

 Put Option: Gives the buyer the right to sell the underlying asset at a specified price.

In the Money (ITM): When the strike price of the option is more favorable than the current market price of the underlying asset.

 Out of the Money (OTM): When the strike price of the option is less favorable than the current market price of the underlying asset.

 At the Money (ATM): When the strike price of the option is the same as the current market price of the underlying asset.

 

Greeks: A set of mathematical calculations used to estimate the risk and potential reward of an option position.

 Delta: A Greek that measures the rate of change in an option’s value relative to a change in the underlying asset price.

 Theta: A Greek that measures the rate of change in an option’s value due to the passage of time.

 Vega: A Greek that measures the rate of change in an option’s value due to changes in volatility.

Options can be used for various investment strategies such as hedging, speculating, or generating income. It is important to understand the risks involved and to have a clear investment plan when trading options.