Options Trading Basics For Beginners

Embarking on the journey of options trading can be both thrilling and daunting! If you've ever wondered about the exciting possibilities of trading options but felt a bit overwhelmed, you're in the right place.

In this blog post, we'll embark on a journey through "Options Trading Basics for Beginners," demystifying the essentials and setting you on the path to understanding and navigating this dynamic financial landscape.

So, whether you're new to investing or just curious about expanding your financial toolkit, let's dive into the fundamentals of options trading together!

Basics of Options Trading

Options trading is like making bets on toys. Imagine you want to buy a special toy later, but you're not sure if it will still be fun. So, you pay a small amount to have the option to buy it later, but you don't have to if you don't want to. That's a bit like options trading – making choices about buying or not buying something in the future!There are two types of options: Call option and Put option.

Call Options

A call option is like having a coupon for a new toy. You buy the coupon (option) because you think the toy's price might go up. Later, if the toy's price does go up, you can use your coupon to get it at the lower, original price. But if the toy's price doesn't go up, you don't have to use the coupon.

Example scenario:

• Imagine you buy a call option for a toy at $5. This gives you the right to buy the toy later at $10, no matter its actual price.
• Payoff: If the toy's price goes up to $15, you can use your call option to buy it at $10, making a $5 profit. But if the price stays below $10, you might choose not to use the option, and you only lose the initial $5 you paid for it.

Put Options

A put option on the other hand, is a bit like having insurance for your toy. You buy the insurance (option) in case the toy's price goes down. If the price drops, you can use your insurance to sell the toy at the higher, original price. But if the price doesn't drop, you don't have to use the insurance.

Example scenario:

• Now, let's say you buy a put option for a toy at $15. This gives you the right to sell the toy later at $10, no matter its actual price.
• Payoff: If the toy's price drops to $8, you can use your put option to sell it at $10, making a $2 profit. However, if the price is above $10, you might choose not to use the option, and you only lose the initial $15 you paid for it.

To sum it up, call options are like coupons for buying at a lower price, and put options are like insurance for selling at a higher price. With a call option, you hope prices go up so you can make a profit, and with a put option, you hope prices go down to make a profit. If things don't go as expected, you're not obligated to use the options, but you lose the initial amount you paid for them.

Traders use these options to make choices about buying and selling things in the future based on what they think might happen with prices.

Key Options Trading Terms and Concepts

Strike Price 

The option strike price is the pre-agreed price at which the buyer of an option can either buy (for a call option) or sell (for a put option) the underlying asset. It is the fixed price specified in the option contract, and it plays a crucial role in determining whether the option is profitable or not. If the market price of the asset is above the strike price, the option is said to be "in the money." If the market price is below the strike price, the option is considered "out of the money".

Expiry Date 

The option expiry date is the date when an options contract becomes invalid. After this date, the right to buy or sell the underlying asset at the predetermined price (strike price) expires. Traders must either exercise their option before the expiry date or let it expire, and any unused options become worthless after this designated time. Expiry dates play a crucial role in options trading strategies and decision-making, as they define the timeframe within which the option must be utilized.