What Is Options Trading? Examples and Strategies - TheStreet

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Monitoring positions Understand options trading terminology Traders use some specific terminology when talking about options.

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For a call, the holder has the right to buy the underlying market from the writer. For a put, the holder has the right to sell the underlying market to the writer Premium: the fee paid by the holder to the writer for the option.

What is options trading?

The two terms are used interchangeably below. Learn about the Greeks The Greeks are measures of the individual risks associated with trading options, each named after a Greek symbol.

Why We Sell Options - Options Trading Concepts

Understanding how they work can help you calculate the risk involved with each of the variables that affect option prices. Assuming all other variables stay the same, you can use delta to work out how much impact market movement will have on the value of your option.

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A high theta indicates that the option is close to the expiration date; the closer the option is to expiry, the quicker the time value decays. Popular options trading strategies include: Buying a call option The simplest options trading strategy involves buying a call option when you expect the underlying market to increase in value.

Buying a put option Another simple options trading strategy is to buy a put option when you expect the underlying market to decrease in value.

Whether you prefer to play the stock market or invest in an Exchange Traded Fund ETF or two, you probably know the basics of a variety of securities.

You could also hold your option until expiry, and would profit if the underlying market was below the strike price. Hedging your investment If you own an asset and want to protect it against potential downwards market movement, you could buy a put option on the asset.

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  • The strike price may be set by reference to the spot price market price of the underlying security or commodity on the day an option is taken out, or it may be fixed at a discount or at a premium.
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This is called a married put — if the asset price drops, you would make gains on the put which would help limit your loss. Short calls selling a call A covered call is the simplest short call position — you sell a call option on an asset that you currently own.

This strategy is often used to generate some income when you think an asset you hold is going to stay neutral.

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This is a risky strategy, as you could end up having to pay for the full cost of the asset. Spreads Spreads are when you buy and sell options simultaneously. When you trade with a call spread you buy one call option while selling another with a higher strike price.

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Your maximum profit is who deals with options difference between the two strike prices. Straddles When you place a straddle, you buy or sell a call and a put position simultaneously on the same market at the same strike price.

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This gives you the potential to profit regardless of who deals with options the market moves up or down, making them a good strategy if you expect market volatility but are unsure which way it will move. Your break-even levels will be the strike price, plus or minus the sum of the two premiums on either side of the strike.

How to trade options in the UK

Your maximum risk is still the price you paid to open the positions. The break-even levels only apply if you leave your option to expire. Strangles A strangle is very similar to the straddle above, however you buy calls and puts at different strike prices.

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This means that you typically pay less to open the trade, but will need a larger price movement to profit. The trade is still limited-risk.

Exercising Versus Selling

In the above examples, if you closed your position before expiry, the closing price is affected by a range of factors including time to expiry, market volatility and the price of the underlying market. You can find out more about options trading strategies in our strategy article.

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Choose a market to trade options on You can trade options on a huge number of markets with us in the UK. Use daily and weekly options if you want to take positions on markets quickly, but with greater control over your leverage than when trading other products — such as trading CFDs or spread betting on spot markets.

Find out more about trading daily and weekly, monthly and quarterly options. Decide whether to buy or sell, and place your trade.

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