What is Options Trading?

Ads:

What is Options Trading?

Options is a type of derivative contract which is made between two parties to buy and sell the underlying asset at an agreed price in the future. Here, the buyer of the options contract has the right to execute the options contract, but not an obligation to do so. For this privilege, the buyer of the options contract has to pay a premium to the option seller. And the seller is obligated to Honor the contract.

Positions in Options Trading

The options contract is divided into call option & put option and individuals can take 4 types of positions based on their sentiment toward the market.

Ads:

In The Case Of Bullish Sentiments

  1. Buy a Call Option:  In this position, you buy a call option by paying a premium to the seller. Here your losses are limited to the premium paid to the call option seller.
  2. Sell a Put Option: In this position, you write (sell) the put option contract for which you will receive the premium from the seller. Here your profits are limited to the premium received from the put option buyer.

In The Case Of Bearish Sentiments

  1. Buy a Put Option:  In this position, you buy a put option by paying a premium to the seller. Here your losses are limited to the premium paid to the put option seller.
  2. Sell a Call Option: In this position, you write (sell) the call option contract for which you will receive the premium from the seller. Here your profits are limited to the premium received from the call option buyer.

Advantages Of Options Trading

Here are the advantages of Options trading:

For the Option Buyer

  1. Limited loss and unlimited profit for buyers: In case you buy a call or a put option, your loss will be limited to the premium paid to the option seller. In case the buyer goes right, the potential of earning profits will be unlimited
  2. The choice to execute the contract: If the options contracts do not go in favor of option buyers, they have a choice of not executing the contract.
  3. Low financial Commitment: While entering the options contract, the margin required by the buyer of the options contract is only the premium paid to the seller.

For the Option Seller

  1. Upfront payment: The seller of the options contract receives the premium upfront while entering the options contract.
  2. More chances in favor of the seller: The seller of the options contract has more chances of being right due to factors such as time decay and volatility.

Disadvantages Of Options Trading

Here are the disadvantages of Options trading:

For the Option Buyer

  1. Time Decay: As the days to expiry come closer, the value of the options contract keeps decreasing. Thus the chances of the buyer going right in the option decreases.

For the Option Seller

  1. Limited profit and unlimited loss: While the potential to earn profits is limited to the premium received by the option seller, the potential for incurring loss is unlimited.
  2. Huge margins required: As the potential for downside is huge for the option seller, a huge margin is required to be deposited as a safety against the loss by the seller.

    What is Options Trading?

    Options is a type of derivative contract which is made between two parties to buy and sell the underlying asset at an agreed price in the future. Here, the buyer of the options contract has the right to execute the options contract, but not an obligation to do so. For this privilege, the buyer of the options contract has to pay a premium to the option seller. And the seller is obligated to Honor the contract.

    Positions in Options Trading

    The options contract is divided into call option & put option and individuals can take 4 types of positions based on their sentiment toward the market.

    In The Case Of Bullish Sentiments

    1. Buy a Call Option:  In this position, you buy a call option by paying a premium to the seller. Here your losses are limited to the premium paid to the call option seller.
    2. Sell a Put Option: In this position, you write (sell) the put option contract for which you will receive the premium from the seller. Here your profits are limited to the premium received from the put option buyer.

    In The Case Of Bearish Sentiments

    1. Buy a Put Option:  In this position, you buy a put option by paying a premium to the seller. Here your losses are limited to the premium paid to the put option seller.
    2. Sell a Call Option: In this position, you write (sell) the call option contract for which you will receive the premium from the seller. Here your profits are limited to the premium received from the call option buyer.

    Advantages Of Options Trading

    Here are the advantages of Options trading:

    For the Option Buyer

    1. Limited loss and unlimited profit for buyers: In case you buy a call or a put option, your loss will be limited to the premium paid to the option seller. In case the buyer goes right, the potential of earning profits will be unlimited
    2. The choice to execute the contract: If the options contracts do not go in favor of option buyers, they have a choice of not executing the contract.
    3. Low financial Commitment: While entering the options contract, the margin required by the buyer of the options contract is only the premium paid to the seller.

    For the Option Seller

    1. Upfront payment: The seller of the options contract receives the premium upfront while entering the options contract.
    2. More chances in favor of the seller: The seller of the options contract has more chances of being right due to factors such as time decay and volatility.

    Disadvantages Of Options Trading

    Here are the disadvantages of Options trading:

    For the Option Buyer

    1. Time Decay: As the days to expiry come closer, the value of the options contract keeps decreasing. Thus the chances of the buyer going right in the option decreases.

    For the Option Seller

    1. Limited profit and unlimited loss: While the potential to earn profits is limited to the premium received by the option seller, the potential for incurring loss is unlimited.
    2. Huge margins required: As the potential for downside is huge for the option seller, a huge margin is required to be deposited as a safety against the loss by the seller.
Ads:

Leave a Comment