Many outsiders view option trading as an impossible task. Option trading insiders don’t do much to change this opinion. In fact, at times, it seems they deliberately try to obscure simple concepts just to keep the business to themselves. While it certainly can be complex with certain strategies, at its core option trading isn’t difficult.
In addition, option trading does not require a large bankroll. The truth is, it usually costs far less to own the options than the equivalent value in stocks.
As you may know, option strategies have exotic and seemingly complex names like Iron Condor, Reverse Back Spreads, Butterflies, Straddles, Strangles and Straddles.
In addition, many option traders speak a strange, Greek sounding language peppered with terms like gamma and delta, it’s critical to know that profiting from basic option trading isn’t near as difficult as it may seem from the outside.
This series of articles will start with the most basic of option concepts such as call options and put options. Next, I will build upon the basic building blocks by explaining the terms and strategies in simple, everyday language so every reader can improve their skills and knowledge when option trading. Let’s get started!
A call option is the right but not the obligation to buy a stock at a certain price within a specified time period. Most standard options are based on a monthly time frame. However, some options have weekly expirations and still others, called binary options, can have daily or even hourly expiration timeframes.
A put option is the opposite of a call option. A put option gives the holder the right but not the obligation to sell a stock at a certain price within a specified time period.
The best part is that both put options and call options can be sold as well as purchased!
This means you can short a call by selling it, or go long by buying it. Put options can also be bought or sold by investors and traders. Selling options allows the power of time decay (we will explain this in our next article) work for you rather than against you.
The next article will explain time decay and when you should buy a call option or sell a call option.
Thank you for pointing out the fact that "they deliberately try to obscure simple concepts just to keep the business to themselves" and start the series...To me, knowing how to derive the black-scholes formula doesn't give me more insights about option trading. Look forward to your next article!