Listing Options Trading jobs, it happens often to us to be asked information on what are options in trading.
For this reason, we decided to have a special “episode” of our F.A.Q.s for this specific question.
An option is a contract giving the buyer the right, but not the obligation, to buy or sell an asset (stock or index) at a specific price, on or before a certain date.
An option is a derivative because its value derives from something else. (check Broker vs trader: what is the difference between these two job titles).
The futures contract gives an obligation to both buyer and seller that at the time of expiry it is mandatory for both the parties to honour the contract.
The buyer of an option contract gets a right (but not an obligation) to honour/exercise the contract. For this reason, the maximum losses for a buyer are limited.
The buyer’s right comes with a cost, known as “Option Premium/Price”. This is a sunk cost and cannot be recovered back.
On the other hand, the seller of a contract has an obligation to honour the contract if exercised, for which he receives an “Options Premium/Price” paid by the buyer.
You can smartly utilize Options in trading, according to your outlook on the market.
Similarities between Options and Stocks:
- Listed Options and Stock are both Securities.
- Options and Stock are both actively traded in a listed market and can be bought and sold just like any other security.
- Options and Stock are traded in the same way (with buyers making bids and sellers making offers).
Differences between Options and Stocks:
- Unlike stocks, Options are derivatives (they derive their value from the underlying security).
- Unlike stocks, Options have expiration dates.
- Unlike available stocks shares, there is no fixed number of Options.
- Unlike Options, Stockowners have a share of the company, with voting and dividend rights.
Kinds of options: Call Options and Put Options.
A Call option is an option to buy a stock at a specific price on or before a certain date. In this way, Call options are like security deposits. When you buy a Call option, the option premium (the price you pay for it), secures your right to buy that certain stock at a specified price, called the strike price. If you decide not to use the option to buy the stock, and you are not obligated to, your only cost is the option premium.
Put options are options to sell a stock at a specific price on or before a certain date. In this way, Put options are like insurance policies. With a Put option, you can “ensure” a stock by fixing a selling price. If something happens which causes the stock price to fall, and thus, “damages” your asset, you can exercise your option and sell it at its “insured” price level. If the price of your stock goes up, and there is no “damage,” then you do not need to use the insurance, and, once again, your only cost is the premium.
Check the other Frequently Asked Questions regarding finance jobs >