Options trading has been a popular market for investors over the years. The stock market and the bond market are two examples of where options trading comes in.
Options trading in the stock market is simply buying or selling a stock, index or bond based on the option that the buyer has. When the option buyer makes the contract he or she is giving the seller the right to sell the underlying stock at the agreed upon strike price within a certain period of time, which will be stated as a time period. In options trading, an option is basically a contractual agreement that grants the buyer, the right to buy or sell an underlying asset, instrument or security at a stated strike price before or on a specific date, based on the terms of the contract. The buyer may also pay a premium for the right to purchase, called a margin or premium.
The most common option being traded today is the call option, which gives the seller the right to purchase a stock or bond at an agreed upon price in the future. The seller must pay a specific amount of money, which is called a premium, or mark up before the contract is fully exercised. If the buyer holds the option for a certain period of time, he or she can exercise the right to purchase the underlying asset, while if the buyer does not exercise the right to purchase the underlying asset, he or she does not have the option and the seller must not sell the stock.
Options on equities is also a popular option trading. Equity options are contracts for the seller to purchase a certain share of stock or bond at a price specified by the buyer. The buyer may also pay a premium, a margin or premium for this right to purchase.
There are also trading strategies that investors can use when trading options on stocks and bonds. Some strategies include taking advantage of trends such as a rising market, or falling markets. Some other strategies involve the use of the futures markets, or hedging.
When trading options, it is important to be knowledgeable about the options you are considering so you are not surprised later on. It is also important to get the advice of a professional broker when trading options since they are the best persons to help you understand the risk and return for your investment.