People who trade options, should first of all know what an option exactly is and based on its definition understand how to work with them (options) in a rapid and fast market environment.
Option – is a contract that gives traders an opportunity to either buy or sell an asset (s) in the future within a certain period of time (expiration time), at a fixed price (strike price).
A person who has bough an option or options is called an option holder or buyer/holder. This particular person has a complete right to sell or purchase an asset, yet it is not obligatory. Which means that if he/she doesn’t want to do it, they may not. An option holder concludes a contract with an option seller (also called – seller/writer). When the contract is signed, a holder pays a certain fee to a seller (option premium). In simple words, it is a payment for a right to buy or sell an asset in the future. When this situation happens and the holder decides to either sell or buy an asset, it is called – exercising the option.
Types of Options
Depending on a buyer’s intentions, options can be of the following two types:
- Call option – when a person buys an asset. An option enables a holder to buy an asset in the future at a fixed price;
- Put option – when a person sells an asset. An options enables a holder to sell an asset in the future at a fixed price;
Put and Call option buyers don’t have to buy or sell assets. Yet the Put and Call option sellers have to buy or sell an asset if it is required by options holders.
According to the expirations, there exist the following option types:
- European option (European option style) – the trade can be made only at the last day of an option action;
- American option (American option style) – the option can be either bought or sold during the whole time since the contract was signed;
Type of Assets
Subject to the type of assets, options are divided into:
- Foreign Currency Option – it gives an opportunity to buy or sell foreign currency;
- Stock/Equity Option – an option holder buys/sells shares and stocks;
- Commodity Option – gives a possibility to sell or buy a certain quantity of goods (gold, silver, coffee, wheat, sugar, oil etc);
Having read and understood all the above-mentioned information about Put and Call options, one can conclude that these options are used for trading binary options. Checking and monitoring the assets value, it is pretty easy to predict the right outcome. Perhaps that’s why this type of trading is considered to be one of the easiest among all existing.