What if, instead of a home, your asset was a stock or index investment? Similarly, if an investor wants insurance on his/her S&P 500 index portfolio, they can purchase put options. An investor may fear that a bear market is near and may be unwilling to lose more than 10% of their long position in the S&P 500 index. If the S&P 500 is currently trading at $2500, he/she can purchase a put option giving the right to sell the index at $2250, for example, at any point in the next two years.
Conversely, a put option is a contract that gives the investor the right to sell a certain amount of shares (again, typically 100 per contract) of a certain security or commodity at a specified price over a certain amount of time. Just like call options, a put option allows the trader the right (but not obligation) to sell a security by the contract's expiration date. 
Of course, many investors, especially new investors, are skittish about options. After all, no investor is required to trade this way, and the transactions can seem complicated. But once you know the pros and cons of this type of investing, it can be a powerful part of your strategy. No investors should be sitting on the sidelines simply because they don’t understand options.
With this strategy, the trader's risk can either be conservative or risky depending on their preference (which is a definite plus). For iron condors, the position of the trade is non-directional, which means the asset (like a stock) can either go up or down - so, there is profit potential for a fairly wide range. To use this kind of strategy, sell a put and buy another put at a lower strike price (essentially, a put spread), and combine it by buying a call and selling a call at a higher strike price (a call spread). These calls and puts are short.  
Speculation is a wager on future price direction. A speculator might think the price of a stock will go up, perhaps based on fundamental analysis or technical analysis. A speculator might buy the stock or buy a call option on the stock. Speculating with a call option—instead of buying the stock outright—is attractive to some traders since options provide leverage. An out-of-the-money call option may only cost a few dollars or even cents compared to the full price of a $100 stock.
There are two types of commodity options, a call option and a put option. Understanding what each of these is and how they work will help you determine when and how to use them. The buyer of a commodity option pays a premium (payment) to the seller of the option for the right, not the obligation, to take delivery of the underlying commodity futures contract (exercise). This financial value is treated as an asset, although eroding, to the option buyer and a liability to the seller.
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Still other traders can make the mistake of thinking that cheaper is better. For options, this isn't necessarily true. The cheaper an option's premium is, the more "out of the money" the option typically is, which can be a riskier investment with less profit potential if it goes wrong. Buying "out of the money" call or put options means you want the underlying security to drastically change in value, which isn't always predictable. 
All investors should know how to trade options and have a portion of their portfolio set aside for option trades. Not only do options provide great opportunities for leveraged plays; they can also help you earn larger profits with a smaller amount of cash outlay. What’s more, option strategies can help you hedge your portfolio and limit potential downside risk.

An option remains valuable only if the stock price closes the option’s expiration period “in the money.” That means either above or below the strike price. (For call options, it’s above the strike; for put options, it’s below the strike.) You’ll want to buy an option with a strike price that reflects where you predict the stock will be during the option’s lifetime.
With options markets, as with futures markets, long and short refer to the buying and selling of one or more contracts, but unlike futures markets, they do not refer to the direction of the trade. For example, if a futures trade is entered by buying a contract, the trade is a long trade, and the trader wants the price to go up, but with options, a trade can be entered by buying a Put contract, and is still a long trade, even though the trader wants the price to go down. The following chart may help explain this further:
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Volatility also increases the price of an option. This is because uncertainty pushes the odds of an outcome higher. If the volatility of the underlying asset increases, larger price swings increase the possibilities of substantial moves both up and down. Greater price swings will increase the chances of an event occurring. Therefore, the greater the volatility, the greater the price of the option. Options trading and volatility are intrinsically linked to each other in this way.
An option's price, its premium, tracks the price of its underlying futures contract which, in turn, tracks the price of the underlying cash. Therefore, the March T-bond option premium tracks the March T-bond futures price. The December S&P 500 index option follows the December S&P 500 index futures. The May soybean option tracks the May soybean futures contract. Because option prices track futures prices, speculators can use them to take advantage of price changes in the underlying commodity, and hedgers can protect their cash positions with them. Speculators can take outright positions in options. Options can also be used in hedging strategies with futures and cash positions.
A longer expiration is also useful because the option can retain time value, even if the stock trades below the strike price. An option’s time value decays as expiration approaches, and options buyers don’t want to watch their purchased options decline in value, potentially expiring worthless if the stock finishes below the strike price. If a trade has gone against them, they can usually still sell any time value remaining on the option — and this is more likely if the option contract is longer.
Hedging a commodity can lead to a company missing out on favorable price moves since the contract is locked in at a fixed rate regardless of where the commodity's price trades afterward. Also, if the company miscalculates their needs for the commodity and over-hedges, it could lead to having to unwind the futures contract for a loss when selling it back to the market.
A bull call spread, or bull call vertical spread, is created by buying a call and simultaneously selling another call with a higher strike price and the same expiration. The spread is profitable if the underlying asset increases in price, but the upside is limited due to the short call strike. The benefit, however, is that selling the higher strike call reduces the cost of buying the lower one. Similarly, a bear put spread, or bear put vertical spread, involves buying a put and selling a second put with a lower strike and the same expiration. If you buy and sell options with different expirations, it is known as a calendar spread or time spread.
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To reiterate, buying options in times of low volatility could prove to be advantageous should the volatility increase sharply. On the other hand, a lack of deviation in the price of the underlying asset will produce lower market volatility and even cheaper option premiums. Once again, pricing is relative and dynamic; "cheap" doesn't mean that it can't get "cheaper".
For example: A trader in October 2016 agrees to deliver 10 tons of steel for INR 30,000 per ton in January 2017 which is currently trading at INR 29,000 per ton.  In this case, trade is assured because he got a buyer at an acceptable price and a buyer because knowing the cost of steel in advance reduces uncertainty in planning. In this case, if the actual price in January 2017 is INR 35,000 per ton, the buyer would be benefitted by INR 5,000 (INR 35000-INR 30,000). On the other hand, if the price of steel becomes INR 26,000 per ton then the trader would be benefitted by INR 4,000 (INR 30,000- INR 26000)
For instance, it is possible to construct an option strategy in the futures markets that is affordable without sacrificing the odds of success...but with the convenience comes theoretically unlimited risk. This is easier than it sounds, similar to the way you would borrow money to pay for a house or a car, you can borrow money from the exchange to pay for long commodity option trades. There are an unlimited number of combinations of self-financed trades but they are typically going to involve more short options than long options, or at least as much premium collected on the sold options than that paid for the longs. In essence, the money brought in through the sale of the short options goes to pay for the futures options that are purchased. The result is a relatively close-to-the-money option with little out of pocket expense but theoretically unlimited risk beyond the strike price of the naked short options.
Options markets trade options contracts, with the smallest trading unit being one contract. Options contracts specify the trading parameters of the market, such as the type of option, the expiration or exercise date, the tick size, and the tick value. For example, the contract specifications for the ZG (Gold 100 Troy Ounce) options market are as follows:
Now, think of a put option as an insurance policy. If you own your home, you are likely familiar with purchasing homeowner’s insurance. A homeowner buys a homeowner’s policy to protect their home from damage. They pay an amount called the premium, for some amount of time, let’s say a year. The policy has a face value and gives the insurance holder protection in the event the home is damaged.
Unlike other investments where the risks may have no boundaries, options trading offers a defined risk to buyers. An option buyer absolutely cannot lose more than the price of the option, the premium. Because the right to buy or sell the underlying security at a specific price expires on a given date, the option will expire worthless if the conditions for profitable exercise or sale of the option contract are not met by the expiration date. An uncovered option seller (sometimes referred to as the uncovered writer of an option), on the other hand, may face unlimited risk.
There is a concert of Coldplay happening in an auditorium in Mumbai next week. Mr X is a very big fan of Coldplay and he went to ticket counter but unfortunately, all the tickets have been sold out. He was very disappointed. Only seven days left for the concert but he is trying all possible ways including black market where prices were more than the actual cost of a ticket. Luckily his friend is the son of an influential politician of the city and his friend has given a letter from that politician to organizers recommending one ticket to Mr.X at actual price. He is happy now. So still 6 days are left for the concert. However, in the black market, tickets are available at a higher price than the actual price.

A longer expiration is also useful because the option can retain time value, even if the stock trades below the strike price. An option’s time value decays as expiration approaches, and options buyers don’t want to watch their purchased options decline in value, potentially expiring worthless if the stock finishes below the strike price. If a trade has gone against them, they can usually still sell any time value remaining on the option — and this is more likely if the option contract is longer.
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Currency rates are representative of the Bloomberg Generic Composite rate (BGN), a representation based on indicative rates only contributed by market participants. The data is NOT based on any actual market trades. Currency data is 5 minutes delayed, provided for information purposes only and not intended for trading; Bloomberg does not guarantee the accuracy of the data. See full details and disclaimer.
• Call Options – Give the buyer the right, but not the obligation, to buy the underlying at the stated strike price within a specific period of time. Conversely, the seller of a call option is obligated to deliver a long position in the underlying futures contract from the strike price should the buyer opt to exercise the option. Essentially, this means that the seller would be forced to take a short position in the market upon expiration.
As an example, let's say a farmer is expecting to produce 1,000,000 bushels of soybeans in the next 12 months. Typically, soybean futures contracts include the quantity of 5,000 bushels. The farmer's break-even point on a bushel of soybeans is $10 per bushel meaning $10 is the minimum price needed to cover the costs of producing the soybeans. The farmer sees that a one-year futures contract for soybeans is currently priced at $15 per bushel.
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worked as JPMorgan Equity Analyst, ex-CLSA India Analyst ; edu qualification - engg (IIT Delhi), MBA (IIML); This is my personal blog that aims to help students and professionals become awesome in Financial Analysis. Here, I share secrets about the best ways to analyze Stocks, buzzing IPOs, M&As, Private Equity, Startups, Valuations and Entrepreneurship.
According to Nasdaq's options trading tips, options are often more resilient to changes (and downturns) in market prices, can help increase income on current and future investments, can often get you better deals on a variety of equities and, perhaps most importantly, can help you capitalize on that equity rising or dropping over time without having to invest in it directly. 
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