What is Options Trading?

Options are a type of financial transaction used to trade financial investment products derived from futures trading . Options give buyers the right , but not the obligation, to buy or sell the underlying asset at a specific price at a certain time in the future.

The underlying asset here can be a stock , commodity , currency or index , etc. The person who buys the option needs to pay a certain fee, which is called the option premium . The size of the option premium depends on many factors, including the option exercise price , option expiration time , volatility of the underlying asset , etc.

What is options trading?

Options trading is a financial derivative of futures trading .

“Futures” means that the trading process is carried out around futures contracts, and “rights” refers to the right to buy or sell futures contracts.

Therefore, option trading is simply a process in which investors buy or sell rights for futures contracts.

Compared with futures trading, the risk of options trading has been adjusted and it is a unilateral rights model, which is different from most financial transactions.

Options trading is widely used for speculation and risk management. Speculators can make profits by buying or selling options, while risk managers can protect their portfolios from unexpected price fluctuations through options trading. Options trading is also highly flexible, and investors can conduct many different types of options trading strategies depending on market conditions.

Let’s use a simple example to explain: “Bill wants to buy a car from Zoe”

Zoe has a car, and Bill offers Zoe the right to purchase the car for $15,000 within one month.

Zoe agreed to the deal and asked Bill to pay 2%, or $300 (option fee), first. Zoe would then fulfill her obligation not to sell the car within the next month. At the same time, when Bill asked to buy the car, she would sell the car to him as agreed before without any additional conditions.

This process is the basic process of an option contract, in which:

The commitment reached between Zoe and Bill is the “Option Contract”;

Zoe is the seller, also known as the “Originator”, “Option Writer”, or “Option Seller”;

Bill is the buyer, also known as the “Option Holder” or “Option Buyer”;

Bill has obtained the right to buy Zoe’s car, which is called “recipient the right”. The option contract that obtains the right to buy is called “call option”.