What is Option Trading?

An option is a contract that allows investors to buy or sell an underlying instrument like a security, ETF, or even index at a predetermined price over a certain period of time. 

Buying and selling options is done on the options market, which trades contracts based on securities. There are two different kinds of options trading, call and put options – which give the investor the right to sell or buy either type of option.

1. Call option.

Call option is buying an option that allows an investor to buy shares of a certain commodity at a later time. Call are more typically bought by traders speculating the market will go down, known as the bull traders. Here the lower the strike price, the more essential the value the call option.

2. Put option.

Put option is a contract that gives the investor the right to sell a commodity at a specified price over a certain amount of time. Put options are bought by traders speculating the market will go down, otherwise known as the bear traders.

Put options operate in a similar way to calls option, except the security will have to drop in price, if you are buying a put option in order to make a profit. However, one can either buy or sell either type of option.

Options contracts

Option contract is an investment that involves exchanging contracts that have underlying assets such as shares or commodities attached to it rather than buying and selling physical assets. An investor does not need to actually own the assets at any point in order to make a profit.

Trading option can be much risky than any other standard share trading, but is advantageous in a way that options traders can profit regardless of whether stock, commodity or forex prices are rising or falling.

Options can be traded from days, weeks even to a year. Owning an option trading australia entails the buyer paying the seller an amount called premium, and then when selling an option, you buyer receives the premium.

The premium is decided by a few factors;

  • Price

The current rate or price of the commodity is the first thing that determines the premium. The price at which the option buyer can choose to execute is the strike price.

  • Time element.

The date on which the option can be exercised is called the expiration date. Since options are contracts to trade in the future, there is a limited period to conduct the trade, that deciding the premium.

For both call and put options, the more time left on the contract, the higher the premiums are going to be. Longer dated options have higher premiums than shorter dated options.

What Are Vanilla Options?

Vanilla options are contracts that give traders the right to buy or sell a quantified amount of a commodity, at a certain price on a given period of time. The traders have the power to control the commodity and the amount they choose to trade, at the price they choose to trade it.

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