Jason Pfiffner Logo 1

Options Basics

Home    /    Options Basics

Free Online Course

Understanding The Basics

To begin with, it is essential to understand the types of options available in the market. Call options and put options are the primary types of options.

  • A call option gives the purchaser the right, but not the obligation, to purchase an underlying asset at a decided price (strike price) within a particular period of time (expiration date).
  • On the other hand, a put option gives the buyer the right, but not the obligation, to sell an underlying asset at a specified cost (strike price) within a specified time period.

Strike Price - The Key to a Successful Trade

The strike price is an essential aspect of options trading. It is the agreed-upon price between the buyer and seller in the option contract. The seller typically sets a strike price that benefits them, ensuring they make a profit even if they get called out on the option. As a beginner, it’s crucial to understand the importance of strike price in determining your potential profits and minimizing your risks.

business man trader investor analyst checking trading data

Expiration Date – Knowing When to Act

The expiration date is the date or time by which the buyer of an option must exercise their right to purchase or sell the underlying asset. It’s vital to understand the expiration date, as the option becomes worthless if the buyer doesn’t exercise their option by the expiration date. Timing is critical in options trading; knowing when to act can make all the difference.

Key Indicator of Profitability

The Moneyness of options refers to the relationship between an option’s strike price and the asset’s current market price. Options can be in the money (ITM), out of the money (OTM), or at the money (ATM). Understanding the moneyness of options is crucial in determining the premium buyers are willing to pay and sellers are willing to accept the option.

ITM

• An option is considered "in the money" (ITM) when the current market price of the underlying asset is higher (for a call option) or lower (for a put option) than the strike price.
• The holder tends to make a profit.

OTM

• An option is considered "out of the money" (OTM) when the current market price of the asset is lower (for a call option) or higher (for a put option) than the strike price.
• The holder goes in a loss.

ATM

• An option is considered "at the money" (ATM) when the asset's current market price is equal to the strike price.
• The holder will not make a profit or a loss.

Welcome to Option Trading 101 with the Grand Protector

Grand Protector INC

Are you ready to embark on an exciting journey into the world of option trading? If you’re new to options or looking to enhance your understanding, you’ve come to the right place. At the Grand Protector, we believe that option trading should be accessible to everyone, and that’s why we’ve put together this comprehensive guide to help you get started.

What are Options?

Options are financial derivatives that give you the right, but not the obligation, to buy or sell an underlying asset, such as stocks, at a predetermined price (the strike price) within a specific period (until expiration). Option trading provides unique opportunities to profit from price movements, hedge against risks, and generate income.

business man trader investor analyst checking trading data

Why Trade Options?

Option trading offers several advantages for investors:

Flexibility

Option trading offers several advantages for investors.

Leverage

With a relatively small investment, you can control a larger position of the underlying asset, amplifying your potential returns.

Hedging

Options can act as insurance, protecting your portfolio from adverse price movements in the market.

Income Generation

Certain option strategies, like covered calls, can generate income by selling options against stock holdings.

Stocks

Call Options vs. Put Options

Call Options

Call options give the holder the right to BUY the underlying asset at the strike price before the expiration date. Traders use call options when they anticipate the price of the underlying asset to rise.

Put Options

Put options give the holder the right to SELL the underlying asset at the strike price before the expiration date. Traders use put options when they expect the price of the underlying asset to fall.

The Basics of Option Trading

Option Premium

The price of an option is called the premium. Buyers pay this premium to acquire the option, and sellers receive it as income.

Expiration Date

Options have a specific expiration date, after which they become worthless if not exercised.

Strike Price

The predetermined price at which the option can be exercised is known as the strike price.

Grand Protector INC

In-the-Money, At-the-Money, Out-of-the-Money

An option is in-the-money if exercising it would result in a profit. At-the-money options have a strike price equal to the current market price, and out-of-the-money options would lead to a loss if exercised.

Ready to Begin Your Option Trading Journey?

Option trading can be both rewarding and challenging. At the Grand Protector, we are committed to providing you with the knowledge and tools you need to navigate this exciting market successfully. Keep exploring our website to access free resources, powerful analytics, and the support of a vibrant trading community.

Happy Trading!