What is options trading
An option is simply an agreement between two parties. Usually a buyer and a seller, and the price paid for the specific option is called the Premium. For example, person ‘A’ (buyer) is looking to buy an apartment and he contacts the owner of that property in order to discuss the details of that property. The owner states the price of the property ($800.000) but person ‘A’ does not have the money upfront to buy the property, but he will be able to have them in the period of 2 years. The owner, however, agrees to sell the property to person ‘A’ but the buyer will have to pay a premium of an additional $4.000.
There are four types of participants in Options Trading.
- Buyers of Calls
- Sellers of Calls
- Buyers of Puts
- Sellers of Puts
Investors who are buying options are named holders and those who are selling options are called writers.
However, there are some differences associated with buyers and sellers.
- Buyers have the facility not to buy or sell as they have the option to implement their rights if they want to.
- Sellers on the other side have to buy and sell or they might require to keep a promise to buy or sell.
Type of options
There are two types of options: the Calls and Puts options.
- Call Option: A Call option provides the right to buy a particular item at a specific cost for a specific time period.
- Put Option: A Put type option provides the holder the right to sell an asset at a specific price for a specific time period.
A Call type option is analogous of having a long position on a stock and a Put type option having a short position on a stock.