Options Trading Basics

Learning about options trading basics is the first thing to consider when deciding to trade options. What is an option? It’s a derivative, meaning price is based on asset. Knowing options trading basics includes learning the terminology like underlying assets. In options trading basics terminology, these can be indexes, ETF’s, or stocks. Options trading basics means buying an option is not an obligation to purchase an asset (stock, etc) but it gives a trader the right to purchase it at a certain price, known as the “strike price.

Options trading Basics - Types of options

Options come in two types: Calls and Puts. In options trading basics, traders buy calls when then anticipate the price of the underlying asset will increase. In options trading basics Puts options work opposite - as the underlying asset decreases the option increases. Traders also use the terms “in the money” (when the price of an asset rises above the strike price in a call option) and “out of the money” (when an asset price dips below the strike price) as part of the terminology in options trading basics.

Options Trading Basics - Buying Options

One of the options trading basics is that options are not stocks. They are “sold” by another trader, not a company like a stock would be. If you understand options trading basics and you are buying options, you are betting the price of the option will go up, thus being profitable to you. In options trading basics though, it is important to remember that the seller is betting the opposite, that the price of the option will go down.

Options Trading Basics - Expiration

An important options trading basics to know is that unlike stocks, options expire. All options expire on the third Friday of the month, at the close of trading. A trader wants to know options trading basics about expiration, because if he is still holding the option at the expiration date, it will be worth nothing. This is a crucial point in options trading basics.

Options Trading Basics - Contracts

Options trading basics includes the term contracts. When a trader is trading options, he is actually buying options contracts, or selling options contracts. The contracts are sold (or bought) in blocks of 100 options of the underlying asset, like a stock. So in options trading basics, we learn that if a trader purchases 4 contracts at $2.00, he will pay $800 to purchase 400 shares.

Options Trading Basics - Strategies

Options trading basics incorporate many different trading strategies. The most commonly used is only buying Puts and Calls. Other options trading basics strategies are selling options, or using sets of options. Of course, there is more to trading options, but these options trading basics can get someone started in trading options. To increase knowledge and thereby increase profits, it is crucial for a trader to understand options trading basics.