Be In The Money — Understanding Trading Strategies

Options are one of the most important financial derivative contracts. This article outlines a number of trading strategies which can be employed to increase your investment value.

It is important to understand behaviour of options and various strategies to limit the risk and further increase the returns. Please always invest wisely and consult a financial adviser.

I have outlined basics of options in my article “The Story Of Option Products”.

This article mainly discusses common options trading strategies.

Please read FinTechExplained disclaimer.

What Is An Option?

Think of an option as a contract that lets option holder buy or sell an asset. The underlying asset of an option could be stocks, foreign currency or indexes (cash settled on indexes e.g. S&P) or interest rates or commodities or futures etc. Option holder pays premium to buy option contract.

Value of an option is derived from price of its underlying asset e.g. commodity, cash, interest rate swap etc.

Two Sides Of Options

There are two sides or legs of an option deal:
1. Buyer side — one who buys (longs) an option is the option holder.

2. Seller side — one who sells (shorts) an option is the option writer.