Basic Of Option strategy:
Definition of an Option: An option is a contract that gives the buyer the right to purchase or sell an underlying asset at a set price by specific expiration date. It’s a right, but not an obligation, to purchase or sell the asset.
Options are simply trading vehicles. The level of risk is correlated to your position size and the odds of success in your time frame before contract expiration. The same principles of practical trading apply to options that apply to other financial markets.
However, with options contracts, you can capture the full Upside move of an underlying asset during a trend, while the downside is capped at the price you paid for the option. The maximum risk to your capital is the price of the option contract.
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Options are useful for leveraging available capital while limiting risk on the downside, allowing you to control more shares of a stock with a small percentage of your trading capital. There is potential for big wins while limiting your losses, which is always your number one goal as a trader.
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Types of Options Contracts
Although most people think of stocks when they consider options, there are a wide variety of instruments that include options contracts:
- Stocks
- Bonds
- ETFs
- Indexes
- Commodities
- Currencies
- Futures
- Other derivatives
Long call
A basic tactic where an investor bets the stock will go above the strike price by expiration.
Position: Purchase of one or more call options
- Bias: Bullish
- Risk: Premium paid
- Profit potential: Unlimited
- Break-even price: Strike price + premium paid
- Accounts eligible: Basic margin, including self-directed investment accounts
- Key insights: Call options are going to be less costly when the implied volatility index (IV Index) is lower.
Long put
A basic tactic where an investor bets the stock will go below the strike price by expiration.
Position: Purchase of one or more put options
- Bias: Bearish
- Risk: Premium paid
- Profit potential: Unlimited
- Break-even price: Strike price – premium paid
- Accounts eligible: Basic margin, including self-directed investment accounts
- Key insights: Put options will nearly always be costlier than corresponding call options