How Do Options Work?

The business of numbers and speculation

Finances, options, speculations and numbers go hand in hand. The benefits of options are something that can never be discounted. They generally have a good potential to increase in the future, which makes investing in options a lucrative proposal. While speculation is one side of the coin, the other side involves some serious number crunching. Before anything else, understanding what an option is and how it works is quite important so as to get the requisite benefits out of it.

What is an option?

An option is nothing but a standardized contract to get stocks at pre-determined purchase rates, within a specific time period/date. Here, when one buys an option contract, there is no obligation, but an option to exercise the contract. If this contact makes some good financial sense at a future date, then one can trade in it.

Essentially, these contracts are an indication of the probable price in a future date. If the probability of something to occur is high, the option would be expensive as the probable profits are also high.

Trading in options has been around for quite some time and has been widely used by all sections of the society to either speculate or protect any asset.

How do options work?

To understand clearly how options trading works, one needs to know the different types of options. There are two types of options. They are the call option and the put option.

  • A call option is an option which gives the owner an option and not an obligation to buy the stock or asset in the future, at a set price.
  • A put option is an option that gives the owner an option to sell the stock at a particular price in the future.

When the price of a stock declines, then put options are purchased so as to profit from these price declines. Call options are generally purchased to leverage on the appreciation of a particular stock.

Options Trading and Binary Options

Apart from the call and put options, there are different types of options present, such as Equity Options, Future Options, Index Options, and Bond Options etc. Based on the method in which the options are traded, the expiration cycle and some other features, they are again classified into different types.

Binary options trading come under the exotic options, which work on a simple Yes or No position. There are many ways in which one can trade in binary options. One way is to trade using the Infinity app.