An Introductory Explanation of Trading Options

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Bored of shares and bonds? It is time to find out what other options you have in the market!

• Options are financial derivatives typically used for speculative day trading, portfolio hedging and potential short-term profits - they are often highly leveraged and are not suitable for long-term investments.
• Options give you a choice to buy or sell the underlying asset (e.g. a share) at a stated price, called the strike price, before or on a predetermined date.
• An options contract gives the buyer the right to either buy or sell the underlying asset at the strike price, but not both. Which right is given is dependent on the type of option in the contract.

“Huh? Why is this so complicated?” Well, almost all financial instruments are complicated, but with this guide, we hope to make it all a little less confusing. Options and CFDs are among the more common financial derivatives that you’ll see when you register with a broker. So, let’s touch on those first!

What is a Financial Derivative?

Financial derivatives refer to financial instruments that derive value from a separate asset, like a share or a group of assets. In other words, these underlying assets act as a benchmark for the value of a financial derivative. Shares, bonds, currencies, indexes, and commodities are common examples of underlying assets.

For example, if you have a financial derivative tied to Apple shares and the price of Apple shares rise, then your financial derivative's price is also likely to go up.

Financial derivatives are complex and require a thorough understanding before diving right in.

What is an Option?

Options are a common form of financial derivative that you may encounter. An options contract is always between a buyer and a seller. Depending on the type of option, the buyer has the opportunity to buy/sell a given underlying asset, such as a share, before or on a predetermined future date. The price at which the buyer buys/sells the underlying asset is fixed. This price is called the strike price.

The buyer does not have an obligation to exercise this right, meaning the buyer can choose whether to buy/sell the asset or do nothing at all (i.e. it's the buyer's option). Once the predetermined date arrives, this right expires.

WHAT ARE OPTIONS? COMPLETED. ✅

Sources:

1. https://www.ig.com/sg/options-trading/what-are-options-how-do-you-trade-them
2. https://www.investopedia.com/terms/o/option.asp
3. Header photo by Pixabay