Options trading is a type of investing where traders buy and sell contracts called options. These contracts 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 set time frame (before or on the expiration date). The underlying asset can be stocks, commodities, currencies, or indices. There are two main types of options:
- Call options: Give the right to buy the asset at the strike price, generally used when anticipating the asset's price will rise.
- Put options: Give the right to sell the asset at the strike price, generally used when anticipating the asset's price will fall.
Options trading can be used for various purposes, including leveraging investments, hedging against potential losses, and generating income through different strategies. However, it involves risks such as market volatility and the pressure of expiration dates. An option holder may choose to exercise the option or let it expire without using it. The price paid for purchasing an option contract is called the premium. In summary, options trading allows investors to potentially profit from price movements of assets without owning them directly, providing flexibility but also requiring a good understanding of the risks and strategies involved. This overview captures the fundamentals of options trading, including its types, purpose, and basic mechanics. Let me know if you'd like me to explain specific strategies or risks in more detail.
