What Type of Option Trader Are You?
There are different types of participants in the options trading market. In fact, when trading options, there are actually four different kinds of participants – each with different goals and expectations about the market and the underlying assets they are trading on. Traders can fit into more than one of these categories, depending upon the type of investment they are making.
One such type of option trader is a call buyer. These investors are also referred to as call holders. The buyer of a call option has the right, but not the obligation, to buy a stock or other underlying asset at a specified price within a specific period of time, or prior to the options expiration date.
Another type of option trader is a call seller, or call writer. The seller of a call option will sell the option to purchase a certain amount of stock to the buyer of a call. If the call buyer exercises their option to purchase the underlying shares prior to the options expiration date, then the seller, or writer, of the call option will be required to sell the stock at that specific price.
Option traders can also buy or sell put options. A buyer of a put option will have the opportunity to sell a certain amount of stock shares at a certain price prior to a certain time. The put buyer is allowed to sell these shares at the set price, regardless of what the price of those shares are actually selling for out in the open market.
Conversely, the seller of a put option is obligated to purchase a certain amount of stock shares at a set price if the buyer of a put option decides to exercise their option to sell. Therefore, if the buyer of the put option chooses to exercise their option to sell, then the put seller will be required to purchase the stock shares at that price, regardless of the actual market value of the stock at that time.
Overall, options trading allows investors to essentially tailor their financial exposure to various events in a more controlled way than they could by using other types of derivatives. It also allows investors to actually act upon predictions about how a particular stock will perform over a set period of time.
Because options can be so versatile, the trading of options can help investors who tend to predict either a market downturn, upswing, or stability over a short time period to actually earn money by selling options to another investor who may have the opposite opinion.
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