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Option basics Options - an option is a contract between a buyer and a seller that gives the buyer the right to buy or to sell an underlying asset at an agreed price. The option period ends at its pre-defined expiration day. There are 2 types of options: • A Call option - gives the buyer the right to buy the underlying asset. • A Put option - gives the buyer the right to sell the underlying asset. Any option is tradable and can be bought or sold an any time until it expires, and its price is determined by the market. A few factors affect the option price, in particular its intrinsic value (the value in case of an immediate expiration) and the time value (the time distance from expiration date). The option is considered "in-the-money" if it has positive intrinsic value, and "out-of-the-money" if the intrinsic value is zero. Writing options – writing is the creation of an option. The writer sells an option which he doesn't own (short selling), and actually creates a new option. Strategy – A combination of several actions of buying or selling options. There are common strategies for different time periods and different market trends (bullish, bearish, etc.). A skilled trader can improvise and develop his own strategies. |
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