What is an option
An options is an financial instrument that works like a contract that gives one party the right but not the obligation to buy or sell a certain asset for a certain price at a certain time in the future. Options are traded on side markets to the stock market. Their value is tied to the value of the underlying asset, the asset that they give you the right to buy or sell.
Some options can only be exercised at a certain time while others can be exercised at any point during their maturation.
What is an options writer
An option writer is the person who creates an option. The person who is obligated to buy or sell a certain asset for a certain price if the other party, the option holder, so desire. Being an option writer is high risk and you can lose a lot of money this way. There is no theoretical limit to how much money you can lose if you underwrite buy options. I do not recommend that anyone act as an options writer.
The options writer earns money when they sell their options on the open market. They hope that the option will mature outside the money. They make a profit if the option is worthless when it matures. They lose money if the option matures in the money. How much they lose depends on how much the underlying asset his worth at the time of maturation. The options is worth, and they lose, the difference between the contract price in the option and the market value for the underlying asset at the time of maturation.
Most financial institution require you to have large holdings to allow you to act as a options underwriter,
What is an options holder
The option holder is the person who have bought the option and has the option to choose to buy or sell a certain asset. A option holder can never lose more then they paid for the option. They can choose to sell the option at any time.
The option holder is free to sell options at any time.
Options can be very volatile and are to be consider high risk investment. Especially if you compare it to purchasing the stock directly. They can however be a good tool for you to use to be able to earn large profits from small investments.
Are options and binary options the same thing?
No binary options and options are not the same things. Binary options are named after regular options to be associated with regular options but there are large differences between the two types of financial instruments.
- An option is a financial instrument sold on the open market that can be bought or sold at any time. How much money you make if it matures in the money depends on the value of the underlying asset.
- A binary options is a financial instrument created by the broker and sold directly to you. It can not be sold and there is not open market for them. How much money you make if they mature in the money is predetermined.
How do you trade with options?
You trade with options through your stock broker in much the same way as you trade stock.
How do you make money with options?
There are two ways to make money with options. Three if you consider acting as options writer and selling the options.
The two ways you can make money as an option holder are:
- By buying an option and later selling it before it matures. You do not have to wait until the option matures to make money this way. Instead you can profit from the fluctuations in the market value of the option. Many options are very volatile which makes it possible to earn large profits. You can make money this way even if the option never reaches the money,
- By buying options that matures in the money. If a option matures in the money then it get exercised and you get the diffidence between the market value of the asset and the contract value in the option. Options are usually settled automatically without anyone having to buy or sell the underlying assets.