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What is Options Trading?

Put simply, in the traditional trading market an Option is a contract where the seller gives the right, but not the obligation, to the buyer to buy or sell an underlying instrument such as a stock, commodity, index, forex pair or another asset. This comes with a predetermined price (the strike price) that the underlying instrument needs to reach before an expiry date.

 Call and Put: In a very broad sense, the two main types of Options are Calls and Puts. The buyer of a Call Option speculates that the price will rise. The buyer of a Put Option speculates the price will fall.

Put and Call buttons.

The Strike Price: The strike price is the price of the underlying instrument on which the contract is set. E.g “Apple | Call 300 | Jul” is a contract based on the price of Apple being above, or below, $300 when it expires in July. In this case, the Strike Price is $300. A buyer of this contract expects the price of Apple shares to be above $300 when it expires.

Expiry Date: Every Option contract comes with an expiry date. If the rate of the underlying instrument does not reach the Strike Price before this date, the Option will expire with little, or no value. Also, the longer time duration an Option has, the more chance the market will move in the holder’s favour: in other words, the closer the contract gets to the expiration date, the less the time value of the option.

Some of the factors that influence the value of Options:

  • The current price of the underlying instrument.
  • Amount of volatility in the market.
  • Expiry date (the longer it is until the expiry date, the more time the market has to hit the strike price).
  • Supply and demand in the underlying market for the specific Option.

 

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