What Is Option Trading? 8 Things to Know Before You Trade | Ally

Trading options what is. What Is Option Trading? 8 Things to Know Before You Trade

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Option buyers are charged an amount called a "premium" by the sellers trading options what is such a right. In contrast, option sellers option writers assume greater risk than the option buyers, which is why they demand this premium. Options are divided into "call" and "put" options.

The distinction between American and European options has nothing to do with geography, only with early exercise. Many options on stock indexes are of the European type. Because the right to exercise early has some value, an American option typically carries a higher premium than an otherwise identical European option. This is because the early exercise feature is desirable and commands a premium.

There are some advantages to trading options. The following are basic option strategies for beginners.

an option is an exchange contract

Potential profit is unlimited, as the option payoff will increase along with the underlying asset price until expiration, and there is theoretically no limit to how high it can go. With a put option, if the underlying rises past the option's strike price, the option will simply expire worthlessly.

In exchange for this risk, a covered call strategy provides limited downside protection in the form of premium received when selling the call option.

Options Trading Explained - COMPLETE BEGINNERS GUIDE (Part 1)

A protective put is a long put, like the strategy we discussed above; however, the goal, as the name implies, is downside protection versus attempting to profit from a downside move.

If a trader owns shares that he or she is bullish on in the long run but wants to protect against a decline in the short run, they may purchase a protective put.

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Hence, the position can effectively be thought of as an insurance strategy. The trader can set the strike price below the current price to reduce premium payment at the expense of decreasing downside protection. This can be thought of as deductible insurance.

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The following put options are available: June options.