Trading Options

Options are a type of financial instruments called derivatives because they derive their value from the value and characteristics of one or more underlying entities such as an asset, index, or interest rate. Usually the underlying assets are stocks, but options can be created for many other types of entities, including already derived values, e.g. inflation, volatility. Options, by construction, have an expiry date, anunderlying asset, a role (buyer or seller of the option), a right/obligation (call, to buy the underlying; put, to sell the underlying), and a strike price (of the underlying). Option strategies are the simultaneous, and oftentimes mixed, buying or selling of one or more options that differ in one or more of the options’ variables. Of course, buying or selling a single option is the simplest option’s strategy.

Options strategies allow to profit from movements in the underlying that are bullish, bearish or neutral. In the case of neutral strategies, they can be further classified into those that are bullish on volatility and those that are bearish on volatility. The option positions used can be long and/or short positions in calls.