Chapter 10. Options Trading

Nowadays, options are quite popular among private investors. These derivatives are very unusual, so trading options requires good preparation. Let’s start with the definition of an option.

An option is a contractual agreement between two parties giving the buyer the right to buy (sell) a certain amount of financial assets (shares or currencies) at a certain point in time at a set price. In this case, the right to buy is not an obligation, as in the case of futures (we will consider them further on). Options trading involves the conclusion of a contract under which the seller is obliged to sell (buy) a specified amount of assets at a price agreed in advance. In option trading, the party buying the option pays a premium to the seller for this right to buy or not buy (sell or not sell) the underlying asset at their discretion.

A call option gives its owner the right to buy the underlying asset for a specified price at a fixed time interval. In this case, the writer of the call option is obliged to sell the underlying to the option holder.

A put option gives its owner the right to sell a certain amount of the underlying asset at a specified price (strike) within a certain period of time. In this case, the seller of the put option is obliged to buy the underlying asset.

As mentioned above, when trading options, the buyer pays the seller a certain price for which the option is purchased. This is called the option premium. The premium is a payment for the right to conclude a transaction within the time period specified in the option.

Options come in two styles – European and American. A European option can only be exercised on the date specified in the option (expiration date). An American option may be exercised at any time prior to the expiration of the designated expiration date.