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Explain Option Trading

Explain Option Trading. Options trading education on everything about call and put options, and the power of options.

Options are without doubt one of the most powerful financial derivatives available in the market. Those who use them well can use them to leverage positions, manage risk and enhance portfolio returns. While stock investors only have the option to buy or sell an equity, options traders can play a variety of different strategies depending on the market and the time frame. Options are extremely flexible instruments that allow you to control an equity or even a piece of real estate for much less money

Call and Put Options

All call and put options have the following characteristics in common:

Options give you the right to buy or sell an instrument.
If you buy an option, you are not obligated to buy or sell the underlying instrument; you simply have the right to exercise the option.
If you sell an option, you are obligated to deliver – or to purchase – the underlying asset at the predetermined price if the buyer exercises his or her right to take delivery – or to sell.
Options are valid for a specified period of time, after which they expire and you lose your right to buy or sell the underlying instrument at the specified price. Options expire on the Saturday following the third Friday of the expiration month.
Options are available at several strike prices that reflect the price of the underlying security. For example, if a stock is trading at $100 a share, you can buy options at strike prices of 85, 90, 95, 105, 110. As the stock moves, the number of strike prices increases.

Long-term equity anticipation securities (LEAPS)

What are LEAPS? Long-term equity anticipation securities are long-term options that exhibit the same characteristics as normal options, with the exception that LEAPS have a much longer time to expiry. Some long-term equity anticipation securities can have expiration terms of more than two and a half years.

Option Chains

To explain option trading, you must learn to read option chains. These are tools which offer crucial details for a number of options: the current market prices, liquidity, available strike prices, time to expiry.

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