4. options trading strategies

How Options Work

In most cases, options investors pay an up-front fee to buy the option. You can view options for a specific security on an options chain, a visual display that shows you currently available options for that stock or commodity.

Call options give you the right to buy a security at a specific future price, indicating that you think the price of an asset will increase between buying the option and the exercise date. Put options give you the option to sell an asset, similar to short selling, where you profit if the asset value falls. Every contract gives you the right to buy or sell 100 shares.

If the underlying investment is worth more than the agreed upon purchase price (also known as the strike price), the option is considered “in the money” and exercising it will yield a profit. Conversely, if the investment is worth less than the strike price, the investment is “out of the money” and expires unprofitable, with the initial cost considered an investment loss.Options vs. Futures: Options give you a choice to buy or sell an asset on a specific future date, while futures contracts require you to buy or sell on the specific future date. This makes options less risky than futures in most situations.

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