{"id":575174,"date":"2023-03-29T12:24:03","date_gmt":"2023-03-29T09:24:03","guid":{"rendered":"https:\/\/www.etoro.com\/?page_id=575174"},"modified":"2024-08-19T14:45:58","modified_gmt":"2024-08-19T11:45:58","slug":"what-are-options","status":"publish","type":"page","link":"https:\/\/www.etoro.com\/en-us\/options\/uk\/what-are-options\/","title":{"rendered":"Options 101: Options trading explained"},"content":{"rendered":"\n

Ready to learn about options? In this article, we\u2019ll walk you through some of the basic terminology and strategies surrounding options.<\/p>\n\n\n\n

How to understand options<\/h2>\n\n\n\n

Options are a financial asset known as a derivative \u2014 meaning that they derive<\/i> their value from somewhere else. In this case, stocks.<\/p>\n\n\n\n

While the ins and outs of options can be complicated, the overall premise is simple: Buy a contract now, in order to lock in a purchase (or sale) price for later \u2014 even if that price changes for the general public. This means that you can leverage a small amount of money to make a much larger profit \u2014 if your predictions about the market are correct.<\/p>\n\n\n\n

Options terminology<\/h2>\n\n\n\n

Like any new corner of the market, options come with their own set of vocabulary words. To get a sense of what everyone\u2019s talking about when engaging with options, the following terms are a good place to start:<\/p>\n\n\n\n

Call: <\/b>An options contract that gives the buyer the right to buy<\/i><\/b> shares at a particular price<\/p>\n\n\n\n

Put: <\/b>An options contract that gives the buyer the right to sell<\/i><\/b> shares at a particular price<\/p>\n\n\n\n

Spread: <\/b>A combination of two or more options for the same stock. This can be a combination of calls, puts, or both<\/p>\n\n\n\n

Strike price: <\/b>The price at which the buyer of a contract can exercise their right to buy or sell shares<\/p>\n\n\n\n

Premium: <\/b>The price you pay for the contract<\/p>\n\n\n\n

The Greeks: <\/b>The measurements of change which are used to help determine the market price of an option<\/p>\n\n\n\n

Out of the money: <\/b>An options whose strike price that the underlying security has failed to reach<\/p>\n\n\n\n

In the money: <\/b>An option whose strike price has already been surpassed by the current stock price<\/p>\n\n\n\n

Expiration date: <\/b>The date at which the option expires<\/p>\n\n\n\n

How do options work?<\/h2>\n\n\n\n

So, how does one actually make \u2014 or lose \u2014 money, using options?<\/p>\n\n\n\n

In the simplest terms, it all depends on the direction that you expect the market to move. This will determine what kind of option you decide to purchase and, in turn, how you make (or lose) money.<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

The first way is through calls<\/b>. When you purchase a call, you are expecting the price of the shares to go up. A call gives the buyer the right to buy <\/i>shares at a particular price. When you purchase a call, you are expecting the price of the shares to go up<\/b>. For example, you might buy a call with a $100 premium that reserves your right to buy shares at $10. If the price then goes up to $15, you\u2019d make about $5 for each of your 100 shares \u2014 $500 \u2014 minus the original cost of the option ($400 profit).<\/p>\n\n\n\n

The second way is through puts<\/b>, which reserves the buyer\u2019s right to sell shares at a particular price. Let\u2019s go back to our previous example. If you reserve the right to sell <\/i>your shares at $10, and the price goes down to $5, you\u2019re once again making about $5 per share \u2014 $500 \u2014 minus the original cost of the option (again, a $400 profit for a $100 option).<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

The last way to trade options that we\u2019ll address is called a spread, <\/b>and it involves investing in two, or more, options at once. There are many types of spreads, almost all of them with funny names (verticals, butterflies, condors, straddles, strangles, rolls, and more). Typically, you\u2019ll buy two options, which can help protect against risk or change the likelihood of profit given various price movements.<\/p>\n\n\n\n

In all these cases, your losses are (usually) limited to your premium(s)*. However, that isn\u2019t always the case in the wider world of options trading.<\/p>\n\n\n\n

What are uncovered options?<\/h2>\n\n\n\n

There are many places where you can trade \u201cuncovered\u201d options, which means that you don\u2019t own the underlying shares or options contracts that would cover the short margin risk of holding those contract. In this case, there\u2019s the chance that you would have to shell out a lot of money if the stock moves the wrong way \u2014 even more than the value of the equity in your account \u2014 which could lead to a \u201cmargin call\u201d.<\/p>\n\n\n\n

As you can imagine, this type of options trading can make people wary against options as a whole. The rewards can get extremely high \u2014 but so can the risks.<\/p>\n\n\n\n

But that doesn\u2019t mean that uncovered options are a bad choice for experienced traders. For some, that risk\/reward factor might be what they\u2019re looking for in an investment. However, for now, we don\u2019t offer this type of trading on eToro Options \u2014 meaning those new to options don\u2019t need to worry about this level of risk (though all options carry some level of risk).<\/p>\n\n\n\n

How to use options as a hedge<\/h2>\n\n\n\n

There are a lot of ways that you can use options to enhance or construct your portfolio. One of the more conservative ways is to use options as a hedge.<\/p>\n\n\n\n

Despite their reputation as a high risk\/high reward investment, options can actually help limit<\/i> your risk. Beyond the fact that generally the most you can lose is your premium*, many people actually use options as a way to offset a loss on a stock investment.<\/p>\n\n\n\n

For example, say you bought 100 shares of a stock. You think it\u2019s going to go up (which is why you bought the shares in the first place), but you\u2019re just not sure. You could easily buy a put which covers the same amount of shares, at a strike price not too far off from the current trading price. That way, if the price of the stock \u2014 and therefore your entire stock investment \u2014 does drop, you\u2019ll still make some money because your put could still be profitable. In the end, you might still lose a little, but it won\u2019t be as much as you would have lost with just the stock investment.<\/p>\n\n\n\n

Conclusion<\/h2>\n\n\n\n

If you consider yourself a speculative trader, or you like being a little more hands-on with your portfolio, you might want to consider adding options to your investing strategy.<\/p>\n\n\n\n

While options are extremely varied and can be extremely risky, the experience built on eToro Options is meant to simplify the way you trade and limit the amount you might lose*. That doesn\u2019t mean that eToro Options is for everyone, though. In fact, you\u2019ll need to fit a certain investor profile in order to start trading options on our platform.<\/p>\n\n\n\n

To explore options on eToro Options, click here<\/a>. <\/p>\n\n\n\n

*There are certain edge cases in which you may be exposed to greater loss than your initial investment. Although these instances are rare, they can occur.<\/p>\n\n\n\n

Options are complex products, involve risk and are not appropriate for all investors.\u00a0 You may lose all your invested capital.\u00a0 Please review<\/i> Characteristics and Risks of Standardized Options<\/i><\/a> prior to engaging in options trading.<\/i><\/p>\n\n\n\n

eToro Options offers listed US equity options trading via eToro USA Securities Inc., which is registered with the Securities and Exchange Commission and a FINRA member. Visit our <\/i>Disclosure Library<\/i><\/a> for additional important disclosures including our <\/i>Customer Relationship Summary<\/i><\/a> and <\/i>Privacy Policy<\/i><\/a>. <\/i>FINRA Brokercheck<\/i><\/a>\u00a9 2023<\/i><\/p>\n\n\n\n

eToro UK clients should review<\/i> Terms and Conditions<\/i><\/a> in respect of this service.<\/i><\/p>\n\n\n\n

This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient\u2019s investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.<\/i><\/p>\n","protected":false},"excerpt":{"rendered":"

Ready to learn about options? In this article, we\u2019ll walk you through some of the basic terminology and strategies surrounding options. How to understand options Options are a financial asset known as a derivative \u2014 meaning that they derive their value from somewhere else. In this case, stocks. While the ins and outs of options…<\/p>\n","protected":false},"author":39,"featured_media":511438,"parent":564626,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"","meta":{"_acf_changed":false,"inline_featured_image":false,"sticky_cta_settings":"","footnotes":""},"asset_type":[],"class_list":["post-575174","page","type-page","status-publish","has-post-thumbnail","hentry"],"acf":[],"yoast_head":"What are options? The complete guide to options trading<\/title>\n<meta name=\"description\" content=\"Options are contracts that give investors the option to buy or sell a security at a specific price. 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