Different Types of Options Trading

Options

Options are derivative contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price (strike price) within a predetermined period (expiration date). Options are versatile financial instruments used for hedging, speculation, and income generation. 

Types of Options

1. Call Options

Call options give the holder the right to buy the underlying asset at the strike price before the expiration date. Call options are used when traders expect the price of the underlying asset to rise. If the price rises above the strike price, the holder can buy the asset at a lower price, realizing a profit.

2. Put Options

Put options give the holder the right to sell the underlying asset at the strike price before the expiration date. Put options are used when traders expect the price of the underlying asset to fall. If the price falls below the strike price, the holder can sell the asset at a higher price, realizing a profit.

3.Long-term Options:

The holding time is one or many years under these options.

4.Exotic Options: 

Under non-standard options, other than call and put, also known as the vanilla options, are classified as Exotic options.

5.Binary Options

Under binary options, the payoff is pre arranged to be either a fixed amount of compensation if the option expires or nothing if the option expires out of the money. The holder cannot select to buy or sell the underlying asset; the option is by design exercised.

This option is traded on online trading platforms like Orca which are not exercised by regulations. Even though the binary option seems rewarding for investors, they risk being deceitful as they are traded on non-regulated sites.

Types of Options Trading Strategies

1. Buying Call Options (Long Call): This strategy is used when traders expect the price of the underlying asset to rise significantly. By buying call options, traders can profit from the price increase while limiting their risk to the premium paid for the options.

2. Buying Put Options (Long Put): This strategy is used when traders expect the price of the underlying asset to fall significantly. By buying put options, traders can profit from the price decrease while limiting their risk to the premium paid for the options.

3. Covered Call Writing: This strategy involves holding a long position in the underlying asset and writing (selling) call options on the same asset. Traders use this strategy to generate income from the premiums received from selling call options while holding the underlying asset.

4. Protective Put (Put Insurance): This strategy involves buying put options to protect a long position in the underlying asset from a potential price decline. If the price of the asset falls, the put options can be exercised, limiting the losses on the long position.

5. Straddle: This strategy involves buying both a call option and a put option with the same strike price and expiration date. Traders use this strategy when they expect a significant price movement in either direction but are unsure about the direction of the movement.

6. Strangle: This strategy is similar to a straddle but involves buying out-of-the-money call and put options with different strike prices. Traders use this strategy when they expect a significant price movement but are unsure about the direction.

7. Butterfly Spread: This strategy involves buying and selling multiple options with different strike prices to create a "spread." Traders use this strategy when they expect the price of the underlying asset to remain stable within a certain range.

8. Iron Condor: This strategy involves combining a bear call spread and a bull put spread. Traders use this strategy when they expect the price of the underlying asset to remain stable within a certain range.

Conclusion

Options trading offers a wide range of strategies for traders to profit from price movements in the underlying asset. Understanding the different types of options and types of trading strategy available can help traders make informed decisions and manage their risk effectively.