Option Types

Just as with futures contracts, options can be bought on a wide variety of financial instruments, or underlying securities. It’s just another way of trading in the financial markets.

Equity Options

Possibly the simplest type of option, and the one generally referred to above, is the equity or stock option which has stock in a single company as the underlier. Each option contract covers 100 shares. If you buy a call option, you are hoping for the share price to increase to bring you into profit. Remember that the option gives you the right to buy the shares at the strike price, so if the price of the shares is over that price, you have profited.

If you buy a put option, you have the right to sell shares at the strike price, so you are hoping that the share price will fall below it, and you will make money that way. How much the price has to rise or fall to make a profit from these options depends on what strike price you have settled on.

Equity options are exchange traded and usually physically settled. You can take a profit anytime before the expiration date simply by trading the option back on the exchange, as long as it has gone up in value. You don’t need to exercise the option to close your trade.

Index Options

These are similar to equity options, but as with futures, it is impractical to give physical delivery, so they are cash settled with no shares changing hands. They allow diversification into the overall market, and give a leveraged way to profit from an upturn or a fall in the economy.

This entry is filed under course. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.