What is option trading and how it works?
Options trading is the practice of buying or selling options contracts. These contracts are agreements that give the holder the choice to buy or sell a collection of underlying securities at a set price by a specific date. Investors can, but don't have to, own the underlying security to purchase or sell an option.
What is an example of option trading?
Example: Stock X is trading for $20 per share, and a call with a strike price of $20 and expiration in four months is trading at $1. The contract pays a premium of $100, or one contract * $1 * 100 shares represented per contract. The trader buys 100 shares of stock for $2,000 and sells one call to receive $100.
How do options trade for beginners?
Options can be less risky for investors because they require less financial commitment than equities, and they can also be less risky due to their relative imperviousness to the potentially catastrophic effects of gap openings. Options are the most dependable form of hedge, and this also makes them safer than stocks.