Want to diversify your portfolio and explore new trading opportunities? Options trading could be your next financial tool. It might sound complex, but it is arguably one of the most flexible ways to invest in the stock market without owning the stocks themselves.
For beginners, options trading sounds particularly intimidating, with terms like “calls,” “puts,” “strike prices,” and “expiration dates.” But once you grasp the basics, you’ll realize that options offer unique opportunities.
Not sure where to begin? We’ve got you covered. Here’s a short guide covering what options trading is, its types, and why you should consider it:
What is Options Trading?
First off, what exactly are options? They are financial contracts that give the holder the right to buy or sell a financial instrument at a specific price at some point in the future. These contracts have a set expiration date — it can be as short as the day you buy or sell it or as long as a year or more.
Options are available for numerous financial products, such as stocks, funds, commodities, and indexes. The process of buying or selling these financial contracts is called options trading.
Remember these three definitions:
Option premium – the price at which an option is purchased.
Strike price – the price at which an option can be exercised.
Expiration date – the date at which an option becomes worthless.
You can try online options trading using a reliable platform and take advantage of stock movements.
Types of Options: Calls and Puts
An option is a derivative because its value is linked to the price of something else (such as the underlying asset). This is why options are generally divided into two contracts: Calls and puts.
A call option gives the holder the right, but not the obligation, to buy the underlying asset at the strike price. Think of it as a down payment on a future big-ticket purchase. You buy a call if you think the price will go up.
A put option gives you the right, but not the obligation, to sell the underlying asset at the strike price before the expiration date. You buy a put if you think the price of the stock will go down.
Benefits of Trading Options
So why should you trade options? Here are some reasons:
Lower cost than buying stocks
Options let you control shares of stock for a fraction of the price. Trade options with SoFi and get into the market with little money.
Hedging
Many investors and traders use options as a hedge against a declining stock market. Think of it as insurance. For example, buying a put option can protect your stocks against a market downturn.
Portfolio diversification
The most popular benefit of options trading is portfolio diversification. You will also have a flexible investment strategy. With a call option, you can make profits when stocks go up. And with put options, you can profit when stocks go down. It’s a win-win situation.
Options offer strategic and flexible ways to trade the market.