7 Things Every Options Trader Should Know

Investing BY Barsha Dec 12, 2023

Options refer to tradable contracts that provide the choice to purchase or sell an underlying asset at a particular price at a certain date. While it is considered a fairly risky affair, there are also ways to help you avoid risk in several ways. You, too, can start your journey as an options trader today. 

However, you should know certain things about options trading before you start your journey. That is exactly what I will be discussing with you today. This comprehensive guide focuses on the elements every options trader must always take care of. So, without twisting the topic much, let’s get started… 

The Option Premium Is Also Called The Option Price:

The option price you see on your online trading platform is nothing but the option premium. It is the amount that you spend to buy an option. When you trade such options, you trade in these rights without the obligations. You have to pay a separate fee to your broker. So, it is recommended that you find out the ideal brokerage for trading options before choosing a broker.

Types Of Options:

When you have a right to purchase an asset at a certain price, it is called a call option. Traders usually purchase a call option when they predict the cost of a stock to surge upwards. On the other hand, when you have the right to sell an asset at a specified price, it is called a put option. Usually, traders are expected to buy a put option when they predict the stock price to fall.

Purchasing An Option Is A Right With Limited Loss:

Similar to the buyers and sellers of shares, options trading also has buyers and sellers for each option. Based on the view of the stock price fluctuations, an option buyer can purchase a call option or a put option. There is no limit on the profits when a trader buys an option based on price movement. Also, the losses are limited to the premium paid in the trade.

Selling An Option Is An Obligation With Limitless Loss:

You get the right to buy an option only when someone else is willing to give you that right. These people are called option sellers. They will sell call options if they think that the prices won’t go above a certain level. On the other hand, they sell put options when they think that the prices won’t go below a certain level. This is the reason why these option sellers have the potential for unlimited losses, but the profits are limited to the received premium.

All Options Are Time-Bound:

Every option comes with a certain expiry period. In the United States, the expiration date for listed monthly stock options is typically the third Friday of the contract month and 3 PM CST. However, if there is a holiday on the third Friday, the expiration date will take place on Thursday instead that comes right before the third Friday. The time value of the option will keep decreasing and approach zero as it reaches the expiration date.

Buyers Take Advantage Of The Volatility:

Irrespective of the option type (call option or put option), the option buyers usually benefit from a higher level of volatility. While positive volatility offers buyers an opportunity to maximize their profits, negative volatility does not affect them much. This is because option premiums limit the upcoming losses. In simpler words, volatility always benefits the option buyers, while the option seller is exposed to risks.

Options Are Primarily For Hedging:

When you are holding on to a stock, you can protect your downside risk by purchasing a put option. Also, you have the option to lower your holding cost by selling increasing call options that will lose all their worth through expiration. This is why you are required to acknowledge the fact the options are primarily meant for hedging purposes. They are not like regular trading products. You can enjoy favorable outcomes with options when you treat them as a product to hedge your risk.

Conclusion

Since options trading is different from regular stock investing, a lot of people hesitate to start their journey in options trading. However, if you have a clear understanding of the terms and conditions, as well as the risks associated with it, you can be a successful options trader in no time.

So, these are some basic requirements of option trading, and almost every trader should take note of them. I hope this article was helpful to you. If it was, don’t forget to share your comments below. Thank you for reading this far! 

 

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Barsha Bhattacharya is a senior content writing executive. As a marketing enthusiast and professional for the past 4 years, writing is new to Barsha. And she is loving every bit of it. Her niches are marketing, lifestyle, wellness, travel and entertainment. Apart from writing, Barsha loves to travel, binge-watch, research conspiracy theories, Instagram and overthink.

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