Whilst some might think that there is only a couple of different type of options available to act as a protectant when considering buying securities, there are certainly not. The most commonly known types of options are a mere surface of what methods there are.
In this article, we’re going to explore the different types of options that can be purchased, how they work, and what situations they might work best for you in. After reading, you might be interested in reading more general information on options trading here at https://www.timothysykes.com/blog/options-trading/.
Call and Put
Call and put are the most common types of options that are available. They are also probably the best-known.
If you’d like to buy a stock at the price it is at one particular point in time but doesn’t want to shell out all of the money at the time, a call option allows you to do just this. A call option means that you can essentially “reserve” the stock for purchase at that price. Whilst a call won’t stop anyone else from buying all of the stocks, it means that you have until the end of your call options agreement to be able to purchase the stock for the price that was agreed on the taking out of the agreement.
Why might you want to do this? A call means that you are putting something similar to a deposit on a stock’s price. If you’d like to buy the stock at that price, you can buy the right to do so with an option agreement for a certain agreed period of time.
A long call is a variation of a call in which the investor thinks that the value of an asset is going to get larger throughout the time that they have it. As a result of this belief, they purchase a long call that has a lower strike price than what they think the asset’s price is going to reach.
The advantage of this is that if the investor is right and the value of the asset surpasses the strike price, they will be able to buy into that asset for the previously agreed cost. It’s not without its disadvantages though – if the asset does not surpass the strike price, the investor won’t get their initial pay in back.
A put is essentially the opposite of a call. It means that the holder of the contract has the right to sell a stock for a certain time. It is similar to hedging in that it allows the buyer to sell the stock and get out of the holding at any time they like, provided that it’s within the agreed period of time.
When a put option is put in place, it involves a strike price. The strike price provides a base price that the holder of the stock can sell that stock at. For example, if Person A were to take out an option with a strike price of $10 dollars, they can sell that stock at that price up until the end of the option’s operation.
The put option is advantageous to the investor in that it allows them to be sure that they’ll be able to sell their stock for certain price should it start going unexpectedly bad.
A long put is the most common type of put option that’s available to investors. It relies on the fact that the buyer/investor thinks that the asset that they’re planning on buying into is going to lose value over time. What a long put acts as is insurance – it means that should the asset fall below the strike price that you determine, you will be able to still sell that stock or asset on for the previously agreed stock price.
This is advantageous to the investor in that it allows them to have “insurance” in a sense. If the asset price falls too low, they can still sell on for the previously agreed price and will thereby only lose their initial down payment.
Making Sense Of An Options Table
When you decide to start trading in options, one of the most unfortunate yet essential parts of the process is reading and making sense of an options table. Well, it depends on how you look at it. If you have seen an options table before, you may be quite comfortable with its appearance as well as your ability to read and comprehend it. If however, you haven’t seen an options table before, it can be quite a lot to take in at first sight.
Options tables have really quite a large amount of data on display, which is set between a number of different columns and boxes. Like anything else though, once you start to understand all of the headers, the figures, and what they mean, you’ll be in a far better and more comfortable position. Below is a list and corresponding explanations of some of the most regularly occurring column headers in a typical options table.
Bid – the “bid” refers to the most current price that has been offered for the purchase of the option that you are looking at. If you were to purchase this option, this would be the price that you would be required to pay for it.
OpSym – OpSym means Option Symbol. The option symbol holds a number of small and essential pieces of data regarding that option. Most commonly, the strike price, stock symbol, and the date of the contract.
Ask – In contrast to “bid,” ask is the price that has been most recently offered for the sale of the option that you’re looking at.
There’s no doubt that if you’re considering starting to trade options or have already, that you will have a lot to learn. Whilst the complex can seem fairly complicated at first, once it’s broken down it can be far more easily understood. It can offer both financial advantages and disadvantages, assuming you purchase the correct options, of course.