What is options trading?

An option contract is definitely an agreement wherein the owner has got the right to buy or sell a security or an asset at a particular price on a fixed date in the future. Since the owner isn’t devoted to execute the obligation from the contract if he or she feels that it is disadvantageous.

There are two types of options contracts: call options and put options.

Call Options

Basically, call options give the owner the authority to purchase the underlying asset in the contract. Again, it’s not a duty.

For instance, John and Tom agreed on a call options contract wherein John will buy from Tom, 100 shares (equivalent to one option) of Company A at $20 (strike price) what will expire around the third Friday of April. The present cost of the share is $20.

Put Options

In put options, the buyer has the right to sell an asset to the writer (the vendor). Just like the call asset, it’s bounded by a contract which states the underlying asset is going to be sold at a particular price on a date sometime in the future. But the similarity ends there. For put options, the writer needs to buy the underlying asset at the strike price when the buyer exercises this method.

Buying put options allows investors to earn money when the price of shares drops at the end of the contract.

Profit potentials are unlimited for that buyers of put options, particularly if the market begins to sell off. However, risks are limited if the market goes against them.

Important note:

The truth is, trading of options or transactions does not occur between two persons. Selling or buying sometimes happens without knowing the identity from the other party.

Options are only bought from 100 share lots. Therefore if the stock price is $20, you will have to pay $2,000 for every option contract plus the Option Premium.

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