Options trading involves buying and selling contracts called options, which give the holder the right—but not the obligation—to buy or sell an underlying asset at a predetermined price (called the strike price) within a specific time period (expiration date)
. These contracts derive their value from underlying assets such as stocks, ETFs, commodities, currencies, or indices
. There are two main types of options:
- Call options: Give the holder the right to buy the underlying asset at the strike price before expiration. Traders use calls when they expect the asset’s price to rise
- Put options: Give the holder the right to sell the underlying asset at the strike price before expiration. Traders use puts when they expect the asset’s price to fall
Options trading allows investors to speculate on price movements, hedge existing positions to reduce risk, or generate income through various strategies
. Buyers of options pay a premium to sellers (writers), who are obligated to fulfill the contract if the buyer exercises the option
. If the option expires without being exercised, the buyer loses the premium, and the seller keeps it as income
. Options trading is considered more advanced and involves significant risks, including the potential for unlimited losses, so it requires a good understanding of market dynamics and risk management
. In summary, options trading is a flexible investment method that provides the right to buy or sell an asset at a set price within a set time, offering opportunities for profit, hedging, and strategic trading, but it carries substantial risk
