870.Trades Knowledgebase
  • Options Summarized
  • What are Options
    • Must Know Terminology
  • How do Options Work
    • Why Choose Options
    • Call Options & Put Options
    • Other Types of Options
    • Common Option Strategies
    • Reading Option Tables
  • Option Pricing Basics
    • The Greeks
  • Key Concepts
    • Call Options
    • Put Options
    • Strike Price
    • Expiration Date
    • Option Premium
    • In The Money (ITM)
    • Out of the Money (OTM)
    • Implied Volatility (IV)
  • Types of Orders
  • Psychology
  • Terminology
  • Frequently Asked Questions
  • How Taxes Work
  • Risk Management and Techniques
  • Re-entry Strategy
  • Better Diet, Better... Trader?
  • Brokers
  • TOS Scripts
  • Videos
  • 870.Trades - TOS
  • 870.Trades - Disclaimer
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  • Introduction
  • What are they
  • Options as Derivatives

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What are Options

PreviousOptions SummarizedNextMust Know Terminology

Last updated 4 years ago

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Introduction

Options trading may seem overwhelming at first, but it's easy to understand if you know a few key points. Investor portfolios are usually constructed with several asset classes. These may be stocks, bonds, ETFs, and even mutual funds. Options are another asset class, and when used correctly, they offer many advantages that trading stocks and ETFs alone cannot.

Disclaimer: Options involve risks and are not suitable for everyone. Options trading can be speculative in nature and carry substantial risk of loss.

What are they

Options are contracts that give the bearer the right, but not the obligation, to either buy or sell an amount of some underlying asset at a pre-determined price at or before the contract expires. Options can be purchased like most other asset classes with .

Options are powerful because they can enhance an individual’s portfolio. They do this through added income, protection, and even leverage. Depending on the situation, there is usually an option scenario appropriate for an investor’s goal. A popular example would be using options as an effective against a declining stock market to limit downside losses. Options can also be used to generate recurring income. Additionally, they are often used for speculative purposes such as wagering on the direction of a stock.

There is no free lunch with stocks and bonds. Options are no different. Options trading involves certain risks that the investor must be aware of before making a trade. This is why, when trading options with a broker, you usually see a disclaimer similar to the following:

Options as Derivatives

Options belong to the larger group of securities known as . A derivative's price is dependent on or derived from the price of something else. Options are derivatives of financial securities—their value depends on the price of some other asset. Examples of derivatives include calls, puts, futures, forwards, swaps, and mortgage-backed securities, among others.

derivatives
brokerage investment accounts
hedge
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