Course 4
Options Trading
Options are powerful financial instruments that can enhance gains or hedge against losses. But they also carry significant risk. Understand how they work before you trade.
Warning
Options trading involves substantial risk and is not suitable for all investors. You can lose your entire investment in a short period. Please ensure you understand the risks.
What is an Option?
An option is a contract giving the buyer the right—but not the obligation—to buy or sell an underlying asset at a specific price on or before a certain date. Contracts typically represent 100 shares of the underlying stock.
Call Options
A Call gives you the right to buy a stock at a specified price (Strike Price) before the expiration date. You buy a call if you expect the stock price to go up. If the stock explodes upwards, your call option becomes highly valuable.
Put Options
A Put gives you the right to sell a stock at the strike price. You buy a put if you expect the stock price to go down. If the stock crashes, the right to sell it at the higher strike price is very valuable.
The "Greeks"
Options prices are influenced by several mathematical variables, affectionately known as the Greeks.
- Delta: Measures how much the option price is expected to change for a $1 change in the underlying stock.
- Theta: Time decay. Measures how much value the option loses each day as it approaches expiration.
- Vega: Measures sensitivity to changes in the implied volatility of the underlying stock.