What are options? How many types of options are there?

Posted by Ayesha Jaiswal on July 27th, 2017

Options are a type of security that buy and sell at a specific price on pre determined maturity date.

Just same as the futures contract, options also provide protection to the investor as its selling price are pre-decided by the seller. An option is a contract which provides the buyer right but not the obligation to buy and sell a particular security at a specific date, time and strike price, “Strike price” means the price at which put options or call options can be sold or purchased. It is a price which is fixed by the seller of a security for sale of securities in the market.

Options belong to the larger group of security which is known as derivatives, all derivatives means that it's price are determined or derived from the price of something else. Options are derivatives securities and its price also depends on the price of some other assets. If the investor is new in the market then he should refer trading tips by the financial expert just like stock tips and futures tips.

Types of options -

There are various types of options that traded in the market according to choice and needs of investors. There are two main types of options namely 'Call' and 'Put' options.

Following are the types of options -

1.Call options – It is a contract that provides the owner to buy assets at an agreed price.You can buy an asset if you believe that price of that asset would increase after given period of time. Call option contract has pre-decided expiration dates, timing.

2.Put options- It is totally opposite to the call option contracts. The owner of the put options has right to sell the underlying assets in future at agreed price. You would buy a put option if you think the price of a particular asset to decrease in value in future.

3.American style – This option has nothing relation with where the option bought and sold. Option contracts come with an expiration date, at which owner has right to buy and sell underlying assets. In American style options, an owner of the security can exercise prior to the maturity date of assets.That is the advantage of American style options.

4.European style – Owner of the European style option does not have the same advantage as an American style option. If a person European style option then he has not the right to sell and buy assets before the expiration date. He can not exercise it before the maturity date.

5.Exchange traded options – The term exchange is used to describe the contracts listed in public trading exchange. They can be sale and purchase by anyone with the help of the suitable broker.

Options trading involves risk, everyone can not trade in options because it needs a high level of market expertise. Only risk capital can be invested in options. An investor can take help of expert of the market like stock options tips and stock futures tips to improve profit and control loss in the market.