Like the name suggests, option give you options. Buying an option from your broker gives you the right to buy or sell an asset at a set price within a time window.
1. What Kinds of Options Are There?
There are two main types of options, and two major styles: call and put options, and American and European, respectively. Call options enable you to buy the underlying asset at a fixed before the expiration date. Puts are simply the opposite: they enable you to sell the underlying asset at a fixed price before the expiration date. The fixed price contracted in the option is called the strike price.
2. How Can You Lose?
You lose money on a call option if its strike price is above its market price; you lose money on a put option when its market price is above its strike price. Such options are said to be “out-of-the-money.” Either way, whether or not you exercise the option—i.e. Buy or sell the underlying asset—the premium you pay for holding the option on its expiry date is a factor of the spread between the options’ strike price and its market price. The wider the gap between them, the higher the premium you’ll have to pay your broker. At the end of the contract period, your broker has to buy or sell, if it’s a call or put order, respectively, the underlying asset at the contract strike price. The premium you pay for holding the option covers the broker’s cost and then some. Brokers are known as Sellers in the options market, and you, the trader, are a Buyer. Buyers have the option to buy or sell, while sellers are obligated to buy or sell the underlying asset at the strike price by the end of the contract period.
3. American or European?
Looking through the options tables, you’ll soon see that some are labeled “American” and others “European.” This has nothing to do with geography, it’s just a classification of options based on when you can exercise them. American options can be exercised—the underlying asset can be bought or sold—at any time from the date of purchase to the expiration date. European options, on the other hand, can only be exercised on the date of expiration itself. American options are more speculative and potentially more remunerative, whereas European options are more usual simply as a hedge against unpredictable price swings.
4. Let’s Get Technical: Binary Options
Some of you may have heard of binary options. Binary options are a European-style all-or-nothing approach to options trading. There are two main types of binary options: cash-or-nothing and asset-or-nothing options. You win if your binary option closes (reaches the expiration date) in-the-money, that is, if its market price is greater than its strike price. You lose if it closes out-of-the-money. Binary options increase risk, reward, and the number of ways to win and lose. Hone your market skills with binary options trading. Check out www.binaryoptionsguru.org to get started with these powerful financial instruments.