Options Trading Detailed Overview by Jessica Smith

Options Trading Detailed Overview

Options trading is both rewarding and exciting. But, before entering into options, there are some vital facts which you should know. They are slightly different from that of stocks or any other financial instruments. In this article, we have listed some basic option trading facts which every investor should know. We will wrap up the entire article by providing you with some popular brokers for trading these derivative contracts.

1) Types of options

There are two primary types of Options: Puts and Calls.

Put Option provides you with the authority to sell the underlying asset.
The call option provides you with authority to purchase the underlying asset.

There are two broad categories of options, but if we divide it on the basis of other characteristics of options, you will find endless trading positive. In short, we can say that you purchase a put option when you feel that the market is bearish. On the other hand, you purchase a call option when you feel that the market is bullish.

2) Buying and selling of options

Options are a popular derivative tool that enables you to sell or buy an underlying asset at a fixed price. You can sell or purchase options on multiple underlying assets, including indices, futures, stocks, forex, commodities, bonds and several others. Today, most assets are traded through options.

3) Reading options symbols

The Options Clearing Corporation's option symbol contains four parts.

The main symbol of the underlying ETF or stock, stuffed with spaces to six characters.
The symbol contains P or C, reflecting the types of an option, either put or call.
The expiration data contains six digits and is written in the format: yy/mm/dd.
The strike price is 1000 * price and frond stuffed with zero's to eight digits.

How to read the options symbol?

SPGF140520C00500000

SPGF: Options Root
14: Year
05: Month
20: Expiration date
C: Type of option
00500000: Strike price

We can understand this through some examples:

SPX 180115C00059500: This option symbol reflects a call option on SPX with the expiration date of 1/15/2018 with a strike cost of $59.50
LAMR 191125P00021500: This option symbol reflects a put option on LAMR with the expiration date of 11/25/2019 with a strike cost of $21.50

4) Limited life

Options are suitable for a particular period after this time they expire. With this, the option holder loses the authority to sell or purchase the underlying asset at a specific price. This particular interval is known as expiration. There are multiple expiration timings such as Quarterly, monthly, weekly and several other longer durations called LEAPs.

5) Selling an option

If you decide to sell a call option contract, you are bound to provide it at the price at which you sold the call option if the purchaser utilises her or his right to take delivery. If you choose to sell a put option contract, you have to purchase the underlying if exercised.

6) Purchasing an Option

If you decide to purchase an options contract, then you are not bound to purchase the underlying asset. Simply, you have the authority to utilise the option. When you decide to purchase a call option, you have the authority to purchase shares at the strike price of the option.

In the same way, when you purchase a put option, you have the authority to sell shares at the strike price of the option.

7) The strike price

You can select any cost on which you wish to sell or purchase an underlying asset. This price is regarded as a strike price. Options are provided at various strike prices near, far or at the present market amount of the underlying asset.

8) The option premium

The amount indicates a wide variety of things, including the time remaining until expiration, option's volatility, and the underlying security cost. There are various options pricing models which you can employ to estimate theoretical option price by concerning several parameters. In options trading, there are no fixed prices. It is dynamic and keeps on varying with respect to a variable like expiration time and some more.

9) Debit Spreads

Neophytes usually employ debit spreads as options trading strategies. It involves purchasing an option contract with a higher premium and, at the same time, selling an option contract at a low premium. Here, the premium obtained from the written option is less than the premium paid for the spread's long option.

It is different from credit spread since it results in premium paid or debited from the investor's or trader's account when the trading position is opened. Also, traders can employ debit spreads to offset the prices linked with owning long options trading positions.

10) Credit Spreads

A credit spread deals with writing or selling a high-premium option contract and at the same time purchasing a lower premium option. The premium amount spent for the long option is less than the premium obtained from the written option. Thus, resulting in an amount credited into the investor's or trader's account when the trading potion is opened.

When investors or traders utilise a credit spread (options trading strategy), the aggregate gain received is the net premium. It provides returns when the spreads of options contract narrow.

How to start options trading?

To begin options trading, you require a suitable financial service provider who offers these derivative instruments. There are various brokers around which offer top-class services at an affordable price. Some of them are:

1) Brokereo: It is a reliable brokerage firm regulated by the Cyprus Securities and Exchange Commission. The minimum deposit to open a trade with the broker is $250. There is no commission on the trade. Along with this, it offers various research tools and educational courses to enhance your trading standards.

2) T1markets: The Cyprus Securities and Exchange Commission regulates the broker. Hence, it is a safe venture to invest in. It provides both futures and options and asks for $250 to open an account. The trading is facilitated by ultra-modern trading platforms, including Meta Trader 4 and Web Trader.

The Bottom Line

Though options trading is a profit-generation financial instrument, at the same time, it brings along various risks. We will advise you to start your journey with a virtual or demo trading account. It allows you to practice trade with virtual cash and a virtual bank account before entering the real trading world. Through this, you can also apply your trading strategies and check their potential. In case you find them inefficient, you can go with the other or make alterations in the same.

Frequently asked questions

1) What does the options symbol reflect?

You can understand this with an example: SPGF140520C00500000