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What Are Options?

Options are contracts that are used to buy and sell financial products that act as the underlying instrument or asset. An option conveys to its owner the right to buy or sell assets. This is done so at a specific strike price within a set period of time.

The strike price is the price point at which the contract may be exercised, or acted upon. Options act as derivatives because their value is derived from an underlying asset. 

How Do Options Work?

Options can be used to enhance an individual’s portfolio. It can also provide you with additional income, and provide you with options to hedge risk. When an option expires it no longer exists or has any value. There are 2 different types of options including call and puts.

Each type of option can be bought or sold based on the investor’s financial strategy. Call options give you the right to buy an underlying instrument at the set strike price on or before the expiration date. When you buy a put option you are granted the right to sell the underlying instrument on or before the expiration date 

What Are Premiums?

The purchase price of an option that you buy is called the premium. The premium would be considered the current market price of an option. When you sell an option the premium would be the amount of money that you receive in return.

The premium will constantly change along with the price of the underlying security. The varying prices of the premium reflect the price that investors are willing to buy or sell an option. Premiums will usually increase in value as they approach their expiration date and the implied volatility continues to increase. 

What Is a Net Debit?

When you first buy an option you will start with a net debit amount. Let’s say you are starting with a net debit. That means that if you don’t sell the option at a net profit or exercise it, then you might not be able to ever regain the option again in the future. If you do not earn a profit through an exchange, then you must subtract the premium cost from your income in order to reach a net profit. 

What Is a Net Credit?

As a seller, you will begin with a net credit because you will be collecting premiums. The seller with a net credit will keep the money if the option is never exercised. However, you will be obligated to buy or sell the underlying stock

What Are Call Options?

Call options are financial contracts between buyers and sellers. They give you the right to purchase stocks at the strike price according to a specified timeframe. This is based on the options expiration date. A call option gives the buyer the option to buy underlying assets and to lock in a specified price.

An example of a call option would be if you are buying Samsung stocks at $115 per share. Perhaps you think it will go up to $120 a share. This means you’re buying the right to buy those shares at $115. This is opposed to the $120 that you believe it will be worth at the end of your contract. Maybe you are simply buying the shares just to sell them later. In this case, you still aren’t obligated to purchase the shares if the price didn’t go up like you might have expected. 

What Are Put Options?

Put options are contracts that give the holder the right to sell an asset, or an amount of a security at a specified price according to a specified timeline. Put options can be traded on many different types of assets such as stocks, indexes, or even commodities.

Price changes in the underlying asset, the strike price, volatility, interest rates, and time decay will impact the put option prices. Put options will increase in value if the interest rates decrease, and the volatility of the underlying asset price increases. The value of put options also can decrease if the volatility of the underlying asset price increases and the interest rates continue to go up.

What Is In-The-Money?

This expression indicates that the option holder can buy the security at a price that is less than the current market price. This option has no intrinsic value and can be more beneficial to investors compared to the market price of the underlying asset. 

What Is Out-Of-The-Money?

In an out-of-the-money call option, the strike price is higher than the market price of the underlying asset.  An OTM call option has no intrinsic value and they’re less expensive than ITM call options. 

How To Trade Options

Trading options can be very beneficial if you understand how to take advantage of the market conditions. Options are flexible investment tools that can be used to generate income and make lucrative trades. You must first open a brokerage account in order to start trading different stocks and options.

When you are first opening an account you must submit to allowing a brokerage firm to screen you to ensure that you understand the risks and assess your trading experience. You will then have to determine the option contracts you would like to purchase. This is based on where you believe the stock market will start to move in the future.

You will have to predict how high or low the stock prices will move and buy an option based on your financial projections. You will also have to predict the time frame when you believe specific stocks will begin to move. This is done so that you can make effective option trading decisions.

What Affects Options Prices?

Option prices can be affected by factors such as stock prices, the strike price, the expiration date, or interest rates. If the stock price goes up that will cause the price of a call option to also rise and the price of the option will plummet.

Financial Advisors Can Help You Trade Options

Options act as contracts that allow owners the right to buy or sell assets at a specific strike price within a set period of time. Options can enhance your portfolio and help you grow your wealth. It’s important to understand premiums which constantly change along with the price of the underlying security before you make any investments.

Financial advisors can help you invest using options and build a financial strategy that can help you accomplish your goals. A financial advisor can help counsel you on wealth management and recommend specific investments to you based on your financial goals. Financial Advisors can help you understand how options work and how you can effectively trade them. You should consult a financial advisor to help you invest in the stock market today!