The Basics of Options Investing
When investing in options, it is important to be familiar with the related terminology and requirements of these investments. Therefore, having a good understanding of options basics will help an investor to navigate this potentially highly profitable investment territory.
Options are contracts that allow investors to either buy or sell an underlying financial product. Equity options can include products such as stocks, exchange traded securities, and other similar financial vehicles.
There are two types of equity options. These are known as puts and calls. An investor is able to buy or sell both puts and calls. If an investor purchases an option, the purchase price is known as the premium. And, if an investor sells an option, they will receive a premium.
The two parts of the option's premium are the intrinsic value and the time value. If an option is considered to be in-the-money, then it is considered to have intrinsic value. The difference between the intrinsic value and the amount of the premium is known as the time value.
If an investor buys a call option, it gives him or her the right to purchase the underlying financial interest at a specific stated strike price either on or before the options expiration date. If an investor buys a put option, then this means that they will have the right to sell the underlying financial interest on or prior to the expiration date.
Conversely, an investor can also sell, or “write,” both calls and puts. When an investor sells a call, they will thus be obligated to sell the underlying financial instrument at a specified strike price – provided that they are assigned to do so prior to the options expiration date. And, if the investor sells a put option, then they will be obligated to purchase the underlying financial instrument – again, if they are assigned to do so before the option expires.
There are a number of factors that can affect the price of an option. These include both supply and demand in the market where the particular option is being traded. This is somewhat similar to how individual stocks are priced. The overall investment market and the economy can also affect the price of an option as well as its underlying financial instrument.
A good understanding of options basics is important prior to investing in these types of investments. This way, investors can be sure that they know the correct way to proceed.
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