An option is a contract that grants you the right to purchase or sell a financial product for a predetermined amount of time at the agreed-upon price.
Equities, indexes, and ETFs are just a few of the financial instruments that have options accessible. Because the value of the option is “derived” from the underlying asset, options are referred to as “derivatives.”
You swap ownership in a corporation when you trade stocks. The possibility or obligation to purchase or sell the underlying stock is traded when option contracts are bought or sold, in contrast. The mere possession of an option does not grant the holder ownership of the underlying securities or any dividend rights.
Why do options trading?
If you exclusively trade stocks, your main trading options are to purchase the stock when you are bullish or sell the stock when you are bearish.
Options will provide you extra trading opportunities whether you are optimistic, bearish, or even neutral on the market. They have the ability to: Lock in a stock’s price for a predetermined amount of time without having to make a purchase commitment.
Purchase a stock at a later date for less than it is now worth.
Stop a stock in your portfolio from experiencing a significant price drop.
Profit from the stocks you already have in your portfolio.
It’s critical to realize that every option strategy comes with risks, expenses, and trade-offs in addition to any possible rewards. Before engaging in any option strategy, be sure you completely comprehend these components.
You also need a brokerage account that has been authorized for options trading in order to trade options. Your individual options approval level, which is based on a variety of suitability variables that might differ from broker to broker, determines the sorts of options transactions you are permitted to execute.
Puts vs. Calls
Calls A call option grants the contract holder (the call option buyer) the right to purchase the underlying stock at a fixed price by the expiry date Tooltip. When you anticipate that the price of the underlying stock may increase, you often buy calls.
Puts A Put option grants the right to sell the underlying stock at a predetermined price by the expiration date to the contract owner/holder (the Put option buyer). When you anticipate that the price of the underlying stock may decrease, you often buy puts.