What Is an Option & What Are the Different Types of Options?

An option is a contract that gives 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.

As the value is consequent from something else, an option is a derivative.

It is security like stocks with a binding contract. When the expiry date is over, the option loses value. A trader loses the money they paid for the option. An investor is not required to sell or buy the fundamental asset.

Types Of Options:

Call Option:

This provides the holder with the legal right to buy an asset within a definite period of time and at a substantial cost.

Put Option:

This provides the holder with the legal right to sell an asset at a definite time at an actual price.

Those who purchase the options are recognized as the holders, and those who sell them are identified as writers.

An options trading that holds on online trading can be eminent under the following categories mentioned below:

 

Long-term Options:

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

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

 

Binary Options

Under binary options, the payoff is prearranged 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, 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.

 

Momentum Trading: The traders who find stocks that are incessantly and considerably moving upward with a high volume. These traders trade on that to get a high profit.