Capital markets are mainly composed of two components namely: debt market and equity market. A capital market provides a platform for selling and buying of debt bonds and equity (share) market. Option trading is a different type of asset class like bonds, mutual funds etc. Options are easy to understand and can be used to gain benefits which are not available in other asset classes. They come in the category of derivatives. Options enhance the flexibility of an individual’s portfolio, for example: it is used as a tool for hedging potential losses due to declining stock market. Another, application of options is that they are used to determine the direction of the stock with the help of wagering data of the overall market participants.
The word derivative generally means derived, for example: ice cream is derived from milk, which means that the price of the ice-cream indirectly depends on the price of the milk from which it is derived or is a derivative of. Even when a market participant does not use option it is necessary for him to understand how companies in which you invest use them to hedge foreign currency etc. Now days there are many apps and websites that specialize in options trading, for example: www.iqoption.trading that provides you with easy and understandable approach to options. Options provide you with an extra dimension in derivative markets. Similar, to options there are futures which are also part of the derivative market.
You can go for iq option log in to enjoy options trading.
Options provided by options (derivatives)
There are two options provided namely:
- Call option: it gives the owner the right but not the obligation to buy an asset at a set price before a certain fixed date. Call option can be understood as a down payment for something which you will buy in the future.
- Put option: it gives the owner the right but not the obligation to sell an asset at a certain fixed price before a certain date.
Basic terminology used in options
- Strike price: is the price at which an underlying stock can be traded (bought or sold). It is the trigger price for exercising call and put options, for exercising the call option the price should be above the strike price and vice versa.
- OTM and ATM : OTM ( out of the money) which defines a call option which has strike price above the current market price and put option which has the strike price below the current market price. OTM does not have any intrinsic value but rather has a time value in the future. ATM (at the money) which is that the strike price is exactly identical to the current market price of the asset.