While there are many variations that sound exotic, there are ultimately only four basic moves in the options market: You can buy or sell call optio♔ns, or buy or sell put options. In establishing a new position, options traders can either buy or sel🧸l to open. Existing positions are canceled by either selling or buying to close.

Regardless of which side of the trade you take, you're making a bet on the price direction of the underlying asset. But the buyer and seller of options stand to profit or lose in different ways.

Buying and Selling Call Options

A 澳洲幸运5官方开奖结果体彩网:call option gives the buyer, or holder, the right to buy the underlying asset at a predetermined price 澳洲幸运5官方开奖结果体彩网:before the option expires. The underlying asset could be a stock, a currency, or a commodity 澳洲幸运5官方开奖结果体彩网:futures contract.

As the name "option" implies, the holder has the right to buy the asset at the agreed price—called the 澳洲幸运5官方开奖结果体彩网:strike price—but not the obligation.

Every option is essentially a contract, or bet, between two parties. In the case of call options, the buyer i﷽s betting that the price of the underlying asset will be higher on the open market than the strike price—and that it will exceed the strike price before the optio𝄹n expires. If so, the option buyer can buy that asset from the option seller at the strike price and then resell it for a profit.

The buyer of a call option must pay an upfront fee for the right to make that deal. The fee, called a premium, is paid at the outset to the seller, who is betting the asset's market price won't be higher than the price specified in the option.

In most basic options, that premium is the profi🌳t the seller seeks. It is also the risk exposure, or maximum loss, of the option buyer. The premium is based on a percentage of the size of the possible trade.

Buying and Selling Put Options

A 澳洲幸运5官方开奖结果体彩网:put option gives the buyer the right to sell an underlying asset at a specified price on or before a certain꧋ date.

In this case, the buyer of the put option is essentially shorting the underlying asset, betting that its market price will fall below the strike price in the option. If so, they can buy the asset at the lower market price and then sell it to the option selle🦩r, who is obligated to buy it at the higher, agr🅷eed strike price.

Again, the put seller, or writer, is taking the other side of the trade, betting the market price won't fall below the price specified in the option. For making this bet, the put seller receives a premium from the option buyer.

To Open vs. to Close

There are other term🌸s to knowꦦ when executing these four basic trades:

Buy to Open

The phrase buy to open refers to a trader buying either a put or call option that establishes a new position. Buying to open increases the 澳洲幸运5官方开奖结果体彩网:open interest in a particular option, and increasing open interest can signal greater🔜 🅘liquidity and point to market expectations.

澳洲幸运5官方开奖结果体彩网:Sell to close refers to the time that the holder of the options (the original buyer) 澳洲幸运5官方开奖结果体彩网:closes out the♍ call or put position by selling it for either a net profit or loss.

Note that options positions always expire on the expiration date for the contract. At that point, 澳洲幸运5官方开奖结果体彩网:in-the-money options will be exercised and 澳洲幸运5官方开奖结果体彩网:out-of-the-money options will expire worthless.

There💞 is no need to sell to close if an options position is held to expiration.

Sell to Open

A trader may also 澳洲幸运5官方开奖结果体彩网:sell to open, establishing a new position that is short either a call or a put. A sho🐭rt put is actually taking a long position in the underlying market because put options rise in value🍨 as the underlying price declines.

When you sell a naked, or unhedged, option the seller (known sometimes as the writer) is exposed, in theory, to unlimited risk. This is because the seller of an option can see losses mount qui🔜ckly if a short call position sees a rapidly rising underlying market,

澳洲幸运5官方开奖结果体彩网:Buy to close means the option writer is closing out♎ the put or call option they sold.

The Bottom Line

Options tradi♛ng is filled with trader lingo👍, making it seem more complicated than it is.

When you trade options, you're not buying or selling a real asset like a share of stock. You're making a bet on the way that a stock ( or other asset) will move in the market.

Professional options traders commonly use leverage, meaning boﷺrrowed money, in order to multiply their🍷 returns on options trades at a relatively small cost.

This is as risky as it sounds.

That said, the options market is regulated by an independent government agency, the Commodity Futures Trading Commission. The agency has oversight over all derivatives markets including futures, options, and swaps.

Options trading is also used to hedge risk in other investments. This is a better choice for investors who don't have an in-depth understanding of this corner of investing.