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How to trade options on the exchange, Options trading for beginners | Learn more

Option buyers are charged an amount called a "premium" by the sellers for such a right.

Options Trading Basics EXPLAINED (For Beginners)

In contrast, option sellers option writers assume greater risk than the option buyers, which is why they demand this premium. Options are divided into "call" and "put" options.

Trading options is very different from trading stocks because options have distinct characteristics from stocks. Investors need to take the time to understand the terminology and concepts involved with options before trading them. Options are financial derivatives, meaning that they derive their value from the underlying security or stock. Options give the buyer the right, but not the obligation, to buy or sell the underlying stock at a pre-determined price.

There are some advantages to trading options. The following are basic option strategies for beginners.

how to trade options on the exchange

Potential profit is unlimited, as the option payoff will increase along with the underlying asset price until expiration, and there is theoretically no limit to how high it can go. With a put option, if the underlying rises past the option's strike price, the option will simply expire worthlessly.

In exchange for this risk, a covered call strategy provides limited downside protection in the form of premium received when selling the call option.

how to trade options on the exchange

A protective put is a long put, like the strategy we discussed above; option rates, the goal, as the name implies, is downside protection versus attempting to profit from a downside move. If a trader owns shares that he or how to trade options on the exchange is bullish on in the long run but wants to protect against a decline in the short run, they may purchase a protective put.

how to trade options on the exchange

Hence, the position can effectively be thought of as an insurance strategy. The trader can set the strike price below the current price to reduce premium payment at the expense of decreasing downside protection.

This can be thought of as deductible insurance.

how to trade options on the exchange

The following put options are available: June options.