Options Contract
Candlefocus EditorWhen an investor buys a call option, the investor purchases the right to purchase the underlying asset at the agreed-upon price (the strike price) before the expiration date. Conversely, when an investor buys a put option, the investor purchases the right to sell the underlying asset at the agreed-upon strike price before the expiration date.
The primary benefit of an options contract is that options buyers need to put up a fraction of the full value of the position they are opening and a limited amount of risk. This makes them one of the most cost-effective strategies when leveraged against stocks, futures, foreign currencies and so on.
Options contracts are considered to be somewhat complex due to their numerous combination of components, their non-linear payout structures and their value creation mechanisms. In addition, investors must evaluate volatility, dividends, and other factors when trading options to maintain their positions.
An important concept for investors to understand is time decay, or theta. This is the value decrease of an option due to the passing of time, which will eventually make numerous out-of-the-money options worthless. This concept should be taken into consideration when constructing an options strategy, as time decay is the biggest enemy of an options investor.
Options contracts offer many investors the ability to successfully speculate and hedge positions in a variety ways. With sufficient education and experience, investors can unlock powerful risk-management and profitability capabilities using options as part of their overall trading strategy.