6 Types of Options Trading in the Investment Market
A majority of people think of investing only in terms of investing in the stock market. Options trading is a foreign term to most. Buying and holding on to stocks to sell them later for long term gain is one of the most popular strategies. It is an excellent way to invest, as long as you have an idea about which stocks to buy, or you have a broker that guides you on this issue. This is a strategy called the buy and hold, and helps you make good returns eventually, but has not short-term financial gains.
A contract option is an agreement that exists between a buyer and a seller and gives the option buyer the right to buy or sell an asset later, and at an agreed price. Options trading is used in commodities, real estate, and securities transactions.
Types of Options Trading
There are several types of options trading:
A call option offers the buyer the right to purchase the underlying asset. An underlying asset is an asset that is to be bought or sold as per the agreement. It can either be stocks, a commodity such as a bond, gold, an index such as Hang Seng Index, or a currency. The price listed is known as the strike price. The call option buyer determines whether to exercise the option right if the cost of the underlying asset will fetch more than the exercise price.
The trader who holds the put option holds the right to sell the underlying asset in the future, and at a fixed price. A person buys a put option when they think that the cost of the asset might reduce in the future.
This option has nothing to do with America. Typically, the option contract has an option expiry date, which the holder has to exercise their right and buy or sell depending on the option type. In the American option, the holder has the option of buying or selling the asset before the expiry date. In this option, the option seller has more to risk.
In the European options trading, the holder of the option cannot exercise their buying or selling rights before the expiry date. This is the only difference between this option and the American option. In this option, no limitations exist, so this option is not costly in comparison to the other trading options types, thus improving your profits.
An exchange-traded option is standardized and is known as a listed option. A trading options contract that is listed on the public traded exchange is considered as an exchange-traded option. Anybody can trade with this option and it is very popular with traders.
The counter Options (OTC)
Trading options contracts traded in over the counter markets fall under this category. It is not easily accessible as the exchange option. An option in the OTC category is between two private parties and is customized according to the parties’ needs.
Types of Securities
The most common option contract is the stock option, but there are different types of underlying securities available such as:
- Stock Option
- Index Option
- Forex/currency option
- Futures option
- Securities option
Types of Options Based On Expiration
A trading options contract is categorized based on their expiration date:
- Regular Option: Has a standard expiration period. This option gives four different months of expiration.
- Weekly Options is the same as the regular options except its shorter
- Long-term expiration anticipation securities (LEAPS) are a long-term contract that expires in January of each year. It lasts between one and three years.
There are different types of options contracts, with different terms. If you are interested in investing, it is worth researching on the various forms of investments in the market. As a novice, you can involve a reputable broker to guide you in the investment and trading options process. The types of underlying securities vary, and you do not need to worry if you only have commodities as security as various types of securities are acceptable.