What is Options Trading?
What is Options Trading? Find a clear answer in this FAQ by 021 Trade.
Options Trading – Overview
Options trading involves buying and selling contracts that give you the right, but not the obligation, to buy or sell an underlying asset—such as a stock, ETF, commodity, currency, or index—at a predetermined price within a specified time period. In most cases, these contracts expire on the last Thursday of the month.
It is important to note that you do not own the underlying asset unless you choose to exercise the option. Instead, options trading is primarily used to speculate on future price movements.
Types of Options:
- Call Option:
Gives the holder the right to buy the underlying asset at a fixed price. - Put Option:
Gives the holder the right to sell the underlying asset at a fixed price.
Why Traders Use Options:
- To profit from expected price movements
- To hedge against potential risks in their portfolio
- To earn premium income (in case of option selling)
Options trading allows participants to take positions by paying only a fraction of the asset’s total value. Traders often use tools like the option chain to analyze and select suitable contracts for trading.
