Options offer traders leverage and an ability to hedge and limit their losses, but their reputation as risky investments often scare away new traders. That shouldn’t be the case.
An option is a versatile security. It’s a contract that allows the buyer the right to buy or sell an asset within a specific time period. If the asset underperforms, the trader is under no obligation to honor the option contract and can simply let the option expire. When this happens the trader loses the amount of the initial investment, but avoids the losses they would have been saddled with had they purchased the asset outright.
There are two types of options: calls and puts. A call gives a trader the right to purchase an asset within a specific time period. If a trader buys a call, he’s hoping the asset’s value increases before the option expires. A put gives a trader the right to sell an asset; the trader’s hoping that the value declines before the option expires. Buyers of options are referred to as holders, while sellers of options are known as writers. The price that a holder or writer can buy or sell the underlying stock is called the strike price.
There are several advantages to buying options, but most traders will start day trading options for two reasons:
To learn more about day trading options, check back with our blog as we address options strategies in greater detail in our next entries. If you can’t wait to jumpstart your education and want to start trading, contact www.101investing.com today and start your trading journey right now!
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