Trading option will be no more if option traders took a lesson from veteran. It can bear lower risk than the equities because of efficiency cost. Options is the agreement of the buyer and seller through they have the right to buy and sell underlying asset without obligation
Types in option trading:
American option: it can buy and sell at any time before the expiry of the time period.
European option: The option buyer can exercise the right to buy and sell the day of expiry.
Strategy of profitability option trading:
In the money option: ITM gives the positive cash flow to the holder if it immediately is being exercised. In call option if the current value is more than the strike price which means the spot price is more than strike price then it is told ITM.
At the money option: ATM is in the position where no profit or no loss occurs. Spot price equals to strike price, the option is ATM.
Out of the money option: OTM gives the negative cash flow if it is being exercised immediately. Spot price is less than strike price in this case.
Participatory units in option trading:
Writer of an option: the one who is obliged to sell the option against receiving premium if buyer wants to exercise it.
Buyer of an option: the one who buys the authority to sell the option to the seller against paying premium.
Call option: It gives the authority to the trader to buy the option
Put option: It gives the authority to the trader to sell the option
What are the definitions of premium, expiry date:
Premium: The option buyer gives the seller as a payment.
Expiry date: The date which is specified for the contract
The most profitable strategy of option trading:
Selling puts is the best option for making profit. It mainly works on the upward market. If an option trader is in profitable condition before the ending of time value period, he should exit with this profit. Otherwise time value makes decrease the option value. Otherwise he loses his money.
Why options are being called derivative:
Option is a derivative contract because it derives profit. Derivative is a financial contract which includes value, risk and basic term structure from the underlying asset. Options are one type of derivative which gives the right to the holder but not obligation. It can be said that option is the subset of derivatives. For more information, you can check from at https://www.webull.com/quote/etflist.