Options have long been a key trading tool in trading on exchanges and the abundance of choice and the general variety makes it very difficult for beginners to understand this term and its specifics. We will analyze what options actually are.
An option is an important trading instrument in the form of a contract that allows the holder to buy or sell the specified asset at a pre-agreed price for a certain period of time.
There are many options, but to help choose the best one, they are usually divided into several main types.
Let’s consider each of these types in more detail.
Options by type
They are divided into two main types: call option (call) and put option (put).
A call option (buy option) - the owner of the option has the right to purchase a certain asset at the indicated price and within the indicated period of time. For example, if the buyer expects an increase in the value of, for example, stocks, after a certain date.
Put option (sell option) - the owner has the right to sell the asset at a fixed price within a certain period of time. For those who believe the price of assets will reduce in value.
It is important to note that the option holder is unable to use it.
The options market players are divided into the following categories:
Options depending on the underlying asset
Options of this type are divided into:
Different style of options
Options by type of settlement
There are two types of options with regards to settlement: with payment of a premium and without payment of a premium. Options for which the buyer pays the seller a premium directly at the time of the transaction are called premium options.
There are two types of options in market circulation: an exchange option and an over-the-counter option.
Exchange options - all transactions occur through intermediaries and with a fee for their services. Only the value of the option premium is negotiated, the remaining parameters are set by the exchange. They are considered standard options.
OTC options - transactions occur without intermediaries, on negotiable terms. All parameters and conditions are set by the participants in the transaction.
The exercise price of the option is the price at which the underlying asset is bought or sold. The deal must go ahead before the deadline.
Quoted options are those options that are traded on large exchanges. Each option consists of one hundred shares of any company participating in the exchange.
Yield of an option is when the exercise of the option brings profit to the participants in the transaction.
Option premium - the buyer pays a certain amount to the seller of the option. The entire value of the option is called a premium. In fact, a premium is a payment for the possibility of concluding a future transaction. The value of the premium should be beneficial to both parties, and is determined by several factors: the price of the asset, the exercise time of the option, the price range, etc.
The option requires the presence of the following parameters:
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