Option Trading Basics
Option trading is a type of financial trading that involves buying and selling contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset, such as a stock, at a specific price within a specified period of time. These contracts are called options, and they are traded on exchanges just like stocks.
There are two main types of options: call options and put options. A call option gives the holder the right to buy an underlying asset at a specific price, while a put option gives the holder the right to sell an underlying asset at a specific price. The price at which the underlying asset can be bought or sold is known as the strike price.
Options are popular among traders because they offer a way to speculate on the price movements of an underlying asset without actually owning it.
For example, a trader who believes that the price of a stock will go up might buy a call option, while a trader who believes that the price of a stock will go down might buy a put option.
Options also offer a way to manage risk. For example, a trader who owns a stock that has gone up in value might buy a put option to protect against a potential decline in the stock's value. This is known as hedging.
Option trading can be complex and risky, and it is important to understand the mechanics of options before getting involved in trading them. It is also important to have a solid understanding of the underlying asset and the market conditions that can affect its price.
