Take the mystery out of option contracts
This guide covers everything from calls and puts to collars and rolling up, over, or out. It takes the mystery out of options contracts, explains the language of options trading, and lays out some popular options strategies that may suit various portfolios and market forecasts.
how does options investing work?
You should know whether you’re opening or closing, buying or purchasing, writing or selling.
Options trading can seem complicated, in part because it relies on a certain terminology and system of standardization. But there’s an established process that works smoothly anytime a trade is initiated.
Open and Close
When you buy or write a new contract, you’re establishing an open position. That means that you’ve created one side of a contract and will be matched anonymously with a buyer or seller on the other side of the transaction. If you already hold an option or have written one, but want to get out of the contract, you can close your position, which means either selling the same option you bought, or buying the same option contract you sold.
There are some other options terms to know:
An options buyer purchases a contract to open or close a position
An options holder buys a contract to open a long position
An option seller sells a contract to open or to close a position
An options writer sells a contract to open a short position
on which securities are options offered?
you can buy or sell options on stocks, indexes, and an orchestra’s worth of other instruments.
In 1973, the first year that options were listed, investors could write or purchase calls on 16 different stocks. Puts weren’t available until 1977. Today the field of option choices has widened considerably—as of 2016, investors can buy or write calls and puts on over 4,000 different stocks, ETFs, and stock indexes.
The most frequently traded options, or those with the greatest volume, are those on broad-based stock ETFs and on individual stocks issued by large, widely held companies. It’s generally quite easy to find current information about those ETFs and companies, making it possible for investors to make informed decisions about how the price of the underlying is likely to perform over a period of months—something that’s essential to options investing. These options may also be multiply listed, or traded on more than one exchange.