What is options?
 

An option gives an investor the right and opportunity to buy or sell a financial instrument at an agreed price at an agreed time in the future. It is important to make a note of the opportunity and not the obligation to do this trade. As a rule, options are used together with stocks, but they can also be used with ETFs, commodities, cryptocurrencies, etc.

When you buy an option contract, you buy the rights to buy 100 shares in the underlying instrument. That means that you can shift your exposure to this instrument quite powerfully by buying options versus buying the underlying instrument. If you want to only maintain, for example, a stock position, you will also reduce your risk to the downside by holding options versus buying the underlying instrument. More about this is shown below.

The price you pay to get this right is called a Premium. This is a sum issuers of the options contracts get for the risk of offering you this right. You thus write an agreement where the issuer assumes responsibility for buying back or selling you an instrument at a certain price, more about issuance here. If the option reaches the agreed expiration date without being exercised, the issuer of the option will earn money equal to the premium. The biggest loss you as a buyer of options can get is therefore the premium.

Buy options

When buying options contracts most brokers use specific terminologies for the different stages of buying an options contract,  therefore, we will explain these below:

Type = Limit means that when you place an order, the broker will not fill the order at a price higher or lower than the price you have specified.

Buy/Sell = Here you select Buy to open to buy options and Sell to Open to issue options.

Quantity = Here you choose how many options contracts you want to trade with the underlying of 100 pcs per option contract

Expiry = expiration date. This is when the option contract is to expire.

Strike = The price where the buyer of the option (ie you) will have the opportunity to buy the underlying instrument at before the expiration date is reached.

Call/Put = Here you choose whether it should be a buy (call) or sell (put) option.

Price = The price you want to pay for the options contracts (This will be added to the order book if the price is under ask).

Duration = Here you choose how long the order will be in the market. GTC means good to close, which means that the order will be in the market until it goes through.

 

Ticker

Options also have a ticker that provides information about the option contract for the instrument in question. An explanation of how you read these is provided under the image.

Opsjons quote options ticker name

Source: ally.com

XYZ = Which stock or instrument this option is based on.

DECEMBER 17, 2021 = Logically enough expiration date, ie when the option contract expires.

70 = Is "strike price", ie what you as the buyer of the option contract can trigger the contract and buy the underlying instrument at within the expiration date.

Call = Whether it is a buy or sell option.

$ 3.10 = The premium you pay for this particular option.

 

To understand more about the basic principles of options trading, we will further explain the two basic types of options that exist. These are called call options and put options. These two types of options are used together to create and design the most common types of options strategies.  It is therefore very important to understand these if you want to use options for investing.

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