Options are conditional derivative contracts that allow the buyers of the contracts. To buy or sell a security at a chosen price. Best Trading Mentor Option buyers must pay an amount called a “premium” by sellers for such a right. If market prices are unfavourable to option holders, they let the option expire worthless. Ensuring that losses do not exceed the premium. In contrast, option sellers (option sellers) assume greater risk than option buyers, which is why they demand this premium.
Options are divided into “call” and “put” options. With a call option, the buyer of the contract buys the right to buy the underlying asset in the future at a predetermined price. Called the strike price or strike price. With a put option, the buyer acquires the right to sell the underlying asset in the future at the predetermined price.
Why Trade Options Rather Than A Direct Asset?
Trading options has certain advantages. The Chicago Board of Options Exchange (CBOE) is the largest exchange of its type in the world. Offering options on a wide variety of stocks, ETFs, and indices. Traders can build options strategies ranging from buying or selling. A single option to very complex strategies that involve multiple simultaneous option positions. A standard stock option contract controls 100 shares of the underlying security.
Risk/Reward
The potential profit is unlimited, as the option gain will increase with the price of the underlying asset until expiration. And there is theoretically no limit to its amount.
Covered Call
A covered call strategy involves buying 100 shares of the underlying asset and selling. A call option on those shares. When the trader sells the call option, he receives the option premium, which lowers the cost basis of the stock and provides some downside protection. In return, by selling the option, the trader agrees to sell shares of the underlying at the option’s strike price, which limits its upside potential.
Setting Up Protection
If a trader owns a stock that he is bullish on in the long term but wants to protect. Against a short-term decline, he can buy a protective put option.
If the price of the underlying increases and is above the strike price of the put option at expiration, the option expires worthless and the trader loses the premium but still benefits from the increase in price of the underlying. -lying.
Other Options Strategies
Covered call strategy or call-write strategy:
Stocks are bought and the investor sells call options on the same stock. The number of shares you buy must be the same as the number of call option contracts you sell.
Covered Put Option Strategy:
After buying a stock, the investor buys put options for an equivalent number of shares. The put option for couples works like an insurance policy against short-term call option losses with a specific strike price. At the same time, you sell the same number of call options at a higher strike price.
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