Options Trading
Investing in options involves understanding the underlying asset, which is a stock, as well as the options contract. A stock option is a contract that gives the buyer the right to buy or sell shares of a particular stock at a specified, predetermined price at any time prior to the expiration of the contract. To purchase stock options, investors must first understand the different types of options and the associated costs.
The four main kinds of options are calls, puts, covered calls, and cash-secured puts. A call option gives the buyer the right, but not the obligation, to buy a certain quantity of shares of a specific stock at a given price, on a specific date. Those who own the stock are known as holders and the other side, who buy the call options, are known as buyers. If a call option is purchased and the underlying stock rises in price above the exercise price, the investor can take the profit by exercising the option; conversely, if the stock falls in value, the investor will lose the amount paid for the option.
A put option, on the other hand, gives the buyer the right, but not the obligation, to sell a certain quantity of shares of a specific stock at a given price on or before a specified date. Holders are those who agree to buy the stock if the option is exercised, and buyers are those who agree to purchase the put if the option is exercised. If a put option is purchased, the investor can take the profit by exercising the option if the underlying stock falls in value below the exercise price. Conversely, if the stock rises in value, the investor will lose the amount paid for the option.
Covered calls and cash-secured puts are another two options strategies investors can use. A covered call involves writing a call option and owning the underlying stock at the same time, while a cash-secured put involves writing a put option while holding enough cash to cover the obligation, in case the option is exercised.
When purchasing options, investors should take into account the cost of commissions, since different brokerage firms charge different commissions. The cost of options is also impacted by other factors, such as the volatility of the underlying stock and the time remaining until expiration. Finally, investors should keep in mind the risk associated with buying options, since the options may expire worthless if the underlying stock does not move as predicted.
UltraAlgo delivers easy to understand Options data to improve your understanding of the stock market with a little help from artificial intelligence. Combined with our industry leading trading algorithms. Our brokerage intergations include: TradeStation, ToS (ThinkorSwim), TD Ameritrade, Interactive Brokers and TradingView. Our products are designed by veteran quants with 20+ years of experience in high frequency trading for hedge funds and banks.
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