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Popular
financial tools like options give traders and investors flexibility by allowing
them to employ leverage and protect themselves from unfavourable market
moves.For beginner market participants, trading options can be complicated and
risky, leading to significant losses. To minimise risk and maximise deals,
traders must master practical option trading tactics. We have compiled some of
the most popular option trading techniques as well as significant trading
metrics used by option traders.
What is option trading?
The purchasing and selling of options-based financial products is known as option trading. Options are derivative contracts that grant the holder the right to purchase or sell an underlying asset at a predetermined price on or before a particular date. Stocks, indexes, fixed-income assets, foreign exchange, commodities, and exchange-traded funds can all be used as the underlying asset (ETFs). Because the holder of an option contract is not required to buy or sell the asset, they differ from futures contracts. The right to purchase or sell 100 units of the underlying asset is often represented by an option contract. The two most fundamental types of option contracts are call and put options, and margins can be utilised to trade them. With a call option, the contract holder can purchase the underlying asset at a specified price within the specified time range, for fee. Options contracts might differ in terms of their expiration dates. Put options provide the contract holder the right to sell the underlying asset at a certain price within the predetermined time period. American options, for instance, permit exercise at any time before the expiration date. Only on the expiration date may European options be exercised. Perpetual options are a particular type of option contract that have no expiration date. They are only sometimes used, and trading solely occurs over-the-counter (OTC). OTC markets, on the other hand, do not require a centralised exchange because assets are traded directly between counter parties. A network of brokers typically makes trading in OTC marketplaces possible.
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