Trading listed options
Trading options
Options trading strategies can be bullish (if you think the underlying market price will increase), bearish (if you think it’ll fall) or neutral (if you think it’ll stay roughly the same). They can offer significant leverage as generally buying an option is cheaper than buying 100 shares of stock. And, they’ll often mean your risk is capped at what you pay for the option, although depending on the strategy sometimes the potential losses are unlimited.
Remember, options contracts grant the holder the right, but not the obligation, to buy or sell an asset at a predetermined ‘strike’ price before a specified expiration date. These contracts derive their value from two components: intrinsic value, which represents the real value of the option at expiration based on the underlying asset’s price relative to the strike price, and extrinsic value, which accounts for the time remaining until expiration and the implied volatility of the asset.
To master the intricacies of options trading, you need to build a thorough understanding of contract parameters – eg strike prices, expiration dates – as well as the mechanics of exercising or being assigned options contracts. You should also get to grips with ‘the Greeks’ – a set of measures that track how sensitive an option is to the factors that impact its value.
With a solid grasp of these fundamentals, traders can construct strategies that align with their risk tolerance, market outlook and investment objectives, harnessing the versatility of options to potentially enhance their portfolio performance.
Learn more by watching these guides to key options trading concepts:
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