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Options ABC

Views 12k2022.04.08
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A right to buy or sell an underlying asset at a certainpricefor a limited period of  time.

Key takeaways

  • An option is a contract that gives its holder the right to buy or sell a specific security on a specific time at a specific price.

  • There are five basic factors of a standard option: underlying instrument, Strike price, expiration date, contract type and premium.

Understanding an Option

An option is a contract that gives its holder the right to buy or sell an underlying asset on a specific time at a specific price. There are five basic factors of a standard option:

1. Underlying instrument. An Option's price is derived from the underlying instrument which it tracks. The underlying instrument could be stocks, market indices, exchange-traded funds, bonds, currency, interest rates or futures contracts.

2. Strike price. Strike price is the price at which the buyer of the option contract able to buy or sell the underlying instrument. It is also known as the exercise price. Strike price is important because it helps traders to price the value of the option. If an option's underlying instrument can be bought or sold at the strike price to make money, the option has an intrinsic value.

3. Expiration date. Expiration date is the date on which the option you're able to exercise the option. It determines the time value of the option. When an option reaches its expiration date without being exercised, it becomes worthless. Based on whether if an option can be exercised before expiration date, there are two types of options: American options and European options. American options can be exercised any time before the expiration date of the option, while European options can only be exercised on the expiration date.

4. Contract type. There are two types of option Contracts: Call Options and Put Options, you may often heard these as "calls" and "puts". Calls and puts are the opposite of each other. Calls give the buyer the right to buy the underlying asset at the strike price specified in the option contract. On the other hand, Puts give the buyer the right to sell the underlying asset at the strike price specified in the contract.

5. Premium. An option premium is the price paid by the buyer to the seller for an option contract, or the current price of an option contract that has yet to expire.

The content in this article is intended for general circulation and informational purposes only. It does not take into account the investment objectives, financial situation or needs of any particular person and should not be relied on as advice or recommendation. Information provided in this article are not specifically intended for or specially targeted at the public in any specific jurisdiction. Neither Moomoo Inc. nor its affiliates are licensed Financial Advisers and do not provide financial advice. You are advised to consult your financial adviser before making any commitment to invest in any capital markets product. The information published is not and does not constitute or form part of any offer, invitation or solicitation to subscribe or to enter into any transaction in capital markets products. Moomoo is a professional trading app offered by Moomoo Inc. In the U.S., investment products and services on Moomoo are offered by Futu Inc., Member FINRA/SIPC. In Singapore investment products and services are offered through Futu Singapore Pte. Ltd., regulated by the Monetary Authority of Singapore (MAS). This advertisement has not been reviewed by the MAS. Moomoo Inc., Futu Inc. and Futu Singapore Pte. Ltd are affiliated companies. Any illustrations, scenarios, or specific securities referenced herein are strictly for illustrative purposes. Past investment performance does not guarantee future results. Investing involves risk and the potential to lose principal.

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catalog

  • Introduction to options

    • What is an Option?

    • How to check option prices?

    • Why do we use options?

    • Types of options

    • How to trade options?

    • Speculation on call buying

    • Hedging your long term portfolio with Put options

    • What are the risks of options trading?