Option trading and what you need to know about
When it comes to options trading, it is all about trading option while with the options market with brokers with ZAR account. Options refers to the contracts which give the bearer not the obligation but the right to buying or selling amounts of underlying assets at a price that is predetermined before a contract date expires. Unlike with the futures, the holders of the options don’t have to exercise their right to selling or buying if they don’t want to.
With the currency option, it is the options type of contract which is known to offer the holder with the right but not an obligation, to sell or buy a currency pair at a price which is predefined before a set of an expiry date.
The key terms of option:
Options are known to be derivatives, meaning that, they derive their price from the underlying asset value which is also referred to as a security which is underlying. There is an entire range of assets which are underlying. For example, bonds, stocks, indices, commodities such as crude oil and gold, as well as foreign currencies. There are various basket options whereby there are assets which are underlying in a basket or collection of the different assets.
Parties involved in the options contracts
An options contract is all about two parties that include the writer and the holder. The holder who is the bearer, is the automatic contract buyer while for the writer, they are the automatic contract seller.
The hold is known to have an option of effectuating the transaction that is stated in the contract options, and the writer normally obliged in honoring the contract in case the holder decides to continue with the transaction. In case the holder doesn’t exercise their option at any particular point before the date of expiry, then the contract will end up expiring and being terminated.
Paying the premium
When going about buying an option, the buyer is known to pay the seller for trade that is right at a price which is predetermined before a predefined date. It is a payment is normally called the premium.
The premium is normally the cost which is essential of buying the option contract which allows you to eventually buy the assets which are underlying. In this particular sense, the premium gives a down payment for the purposes of the future.
It is the price at which the transaction which is stated in the contract of the options is to be done in case the holder decides to exercise the option. It is also called the exercise price. Place differently, it is the price where the holder will be able to buy, regarding an option of a call, or sell the assets which are underlying regarding putting an option.
An example could be an option contract giving you the right to a platinum of about $600 an ounce for the coming two weeks. If the price of the platinum happens to go up to $620 an ounce, you can exercise your option, buying for $600, $20 less than the current price in the market. But in case the platinum tends to stay below $580 an ounce, you will not be obliged in buying it at $600. But when you don’t exercise your option, you will end up losing the premium that you paid for that particular option.
In the money
It refers to the price of the underlying asset being above the price for strike for the call option or when it is below the price for strike when dealing with a put option, which implies that the holder can be able to exercise the option at a price which is better than the price which is currently in the market.
Out of the money
It refers to the price of the underlying asset being below the price for strike for the call option or when it is above the price for strike when there are put options which indicate that the exercise the option ends up making the holder to incur a loss.
At the money
It is all about the market price of the asset which is underlying and it is either equal or close to the strike price.
The time duration of the options is normally on short term and in most instances, last for a few weeks. Although it is possible for them to last longer that is for a few extra months or even an entire year, but at the end, the option contracts duration will come to an expiry date.
If as a holder you don’t exercise your option at the date of expiry, then the option contract will expire when it is worthless.
There are two main basic types of options which are put options and the call options.
The call options
The calls or the call options tend to allow the holder to be able to buy the underlying assets which are at or which might be above the price for strike over a particular time amount. You will be able to get a long position on the assets which are underlying when you buy a call option.
A long position, which is also known as long, is the asset buying, like a currency or stock with the expectation that it will make the price to increase. The goal is normally in generating a profit via having to sell it immediately after exercise the right of buying. The more the rise in the market prices, the more the profits you are going to make.
The put options
The puts or put options are what give the holder to have the right to sell an asset which is underlying at that price or below the price for strike over a particular time frame. When you have a put option, you will be having a short position which is also referred to as short, on the underlying asset market.