Options are defined as a contract which gives a buyer the right but not binds with obligation to buy or sell an underlying asset at a specified price and on any specific date. Options are traded just as normal stocks or bonds. It has a high potential to make profits as well as is associated with high risks, so knowledge and timing is pretty important while trading options.
Options are divided into two parts namely:
Call option and Put option
Call is the right which gives the holder the right to buy an asset at a certain price and within some specified time period. They are somewhat similar to long positions of stocks. The buyer of a call believes that the stock will increase in respect of its price and in turn increase the option price as well.
Put on the other hand gives a holder the right to sell an asset at some price and in a specified time period. They are similar to short positions of stocks. A buyer of puts believes that the stock price would fall which will help in make more profits upon expiry.
There are basically 4 types of participants in options markets which depend upon the position they take. They are:
- Buyers of calls
- Sellers of calls
- Buyers of puts
- Sellers of puts
Bell the Bull says: The potential to make profits in options is tremendously high compared to normal equity markets. Its however very risky in terms of losses that could be made if not traded in the right manner.