Options trading are the buying of options contracts. Options are contracts under which buyers get the benefit but not the commitment to purchase or sell an asset for a particular rate before a particular date. While this may seem like questionable propositions, options contracts are controlled and binding contracts with strict terms and conditions.
Under a contract, the buyer has the right to purchase or sell an asset. The buyer does not purchase the asset. The buyer purchases the option to buy an asset which is called an underlying asset in options trading terms. The seller in does not have a choice to hold on to the asset. The seller is helped to sell at the underlying asset at the favored price when the buyer exercises the option.
The two positions in options trading are, 'Puts' and 'Calls'. When a buyer applies a 'Put' option, the buyer has the power but not the commitment to sell an admitted quantity of the underlying asset to a seller at the favored price know as the, 'Strike Price'.
When a buyer applies a 'Call' option, the buyer has the power to purchase the specified quantity of the underlying asset, but of the current market rate, at the favored rate before the expiry of the contract. The seller is obliged under the options contract to sell the underlying asset at the contracted rate and cannot need the market rate.
Options Trading has Several Advantages.
1. The main advantage of this type of trading is leverage. The buyer can purchase the underlying asset when the rate of the underlying asset is above at the favored rate rather than the market value and sell the underlying asset at the market rate to make a profit.
2. The other advantage is security. The buyer is protected when the value of the original asset is low the buyer will lose a specific quantity of the original asset at a set agreed price. By applying a 'put' option, the buyer can resell the original asset to the seller. Thus options' trading has built-in support against the volatile changes of the market.
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