What are US stock options?

BiyaPay
Published on 2024-09-05 Updated on 2024-11-05

US stock options are a type of financial derivative instrument that allows investors to buy or sell stocks at a specific price on a future date. It provides opportunities for more strategic trading in the stock market, as well as hedging risks or speculation. The following are some basic concepts and characteristics of US stock options.

1.Basic concepts of stock options

  • Option: An option is a contract that gives the holder the right to buy or sell the underlying stock at a specific price before a specified date, but does not have the obligation to buy or sell.
  • Bullish Option (Call Option): Gives the holder the right to buy the underlying stock at the strike price before the expiration date. If the stock price rises, investors holding bullish options can buy stocks at a lower strike price and profit from it.
  • Put Option (Put Option): Gives the holder the right to sell the underlying stock at the strike price before the expiration date. If the stock price falls, the investor holding the put option can sell the stock at a higher strike price and profit from it.

2.The main components of option contracts

  • Strike Price (Strike Price): The price specified in the option contract for buying or selling a stock.
  • Expiration Date (Expiration Date): The expiration date of the option contract, and the option holder must exercise the option before this date.
  • Premium (Premium): The price paid to purchase an option. Premium is the cost of the option and is determined by market supply and demand.
  • Underlying Stock (Underlying Stock): The actual stock corresponding to the option contract.

3.Trading mechanism of stock options

  • Options Market: Stock options trading is mainly conducted on options exchanges such as the Chicago Board Options Exchange (CBOE) and the NASDAQ Options Market. Investors can trade options through securities brokers or trading platforms.
  • Option Type:
    • European Options: Can only be exercised on the expiration date.
    • American Options: Can be exercised at any time before the expiration date.BiyaPay supports American options.

4.Option strategy

  • Single option trading: involves buying bullish or put options in anticipation of a rise or fall in the price of the underlying stock.
  • Option portfolio strategy: including a combination of multiple options, such as:
    • Buy a combination of bullish and put options (Straddle): used to profit when the underlying stock price fluctuates significantly.
    • A combination of selling bullish options and buying put options (Strangle): used to profit when the underlying stock price fluctuates significantly, but at a lower cost.
    • Bull Spread and Bear Spread: Used to profit when the price of the underlying stock rises or falls, but with limited risk and return.

5.Risk management and return

  • Risk: Options trading involves a high level of risk, including the loss of option premiums and the loss of the time value of options. The option price is affected by factors such as the underlying stock price, volatility, and the passage of time.
  • Returns: Options can bring high returns, but risks need to be carefully managed. Investors can seek returns in various market conditions by choosing the right options strategy.

6.Notes on options trading

  • Education and training: Due to the complexity of options trading, investors should receive adequate education and training before engaging in options trading.
  • Transaction costs: options trading involves transaction costs, option fees and other costs, investors should consider the impact of these costs on the overall return.
  • Market risk: The volatility of the options market is large, and investors need to have strong market analysis ability and risk control ability.

Stock options provide investors with a wealth of trading strategies and risk management tools. When trading options, understanding the basic concepts and market mechanisms of options, and choosing the appropriate option strategy based on personal investment goals and risk tolerance will help improve investment effectiveness and control risks.