In this section, we will cover the basics of how options trading works. We will then explore some strategies that can be used to trade options.
Options are derivative securities that represent a contract between two parties, where one party agrees to buy or sell an asset from the other party at a specific price on or before a given date. The buyer of an option can control whether they want to buy or sell the underlying asset and when they want to do it. The seller of an option commits to either buy or sell the underlying asset should the buyer decide to exercise their right under the agreement.
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There are two main types of options: call and put. Call options give the buyer the right to buy a stock at a certain price (the strike price) by a certain date (the expiration date). Put options give the buyer the right to sell a stock at a certain price (the strike price) by a certain date (the expiration date).
A call option is an agreement that gives you the right, but not the obligation, to buy 100 shares of IBM at $100 in six months. A put option is an agreement that gives you the right, but not the obligation, to sell 100 shares of IBM at $100 in six months. The person who sells you these rights is called your “counterparty” or “writer”.
The writer receives money