What are Options in Stocks? – Types of Options Trading based on Underlying Asset & Time Frame
What are Options in Stocks?
Options trading enables you to buy or sell stocks, ETFs, and other securities at a pre-defined price within a specific date. In option traders, buyers have the choice not to buy the security at a pre-defined price or date. Usually, investors don’t prefer to opt for this style of trading as it is a little complex compared to stock trading. As it is complex in nature, hence it offers huge profits and one can easily restrict losses. Thereby, options trading act as a hedging tool for your securities.
Thus, when the price of the security goes up, you can book relatively larger profits as you don’t have to pay the complete price for the security in case of option contracts. Whereas, when prices go down, you can restrict your losses.
Hoping we have a fair idea of Options Trading now let’s discuss types followed by the steps of doing options trading on Zerodha.
What are the Types of Options Trading in Stocks?
We have heard the most common form of options trading which is put and call options. That I have already in one of my previous articles. Instead, I will try to cover the ones which are derived from underlying assets. Let’s get into it:
Options Trading based on Underlying Asset
- Stock Options: This is the favorite choice of the investors as they can easily relate to this trading style as it has got the shares of publicly listed companies as the underlying asset.
- Index Options: On the same lines, if someone like to replicate the returns of the index like BSE/NSE and can use it as a hedge then they can go with index options.
- Forex/Currency Options: The owner of this option type has the right to buy or sell a specific currency at an agreed-upon exchange rate.
- Futures Options: A futures contract option grants the holder the right, but not the obligation, to buy or sell a specific futures contract at a strike price on or before the expiration date of the option. These operate similarly to stock options, but the underlying security is a futures contract.
- Commodity Options: Like the above forms of options trading this works in a similar fashion only difference is the underlying security which is a commodity in this case.
Options Trading based on Time Frame
As time plays a major role in options contracts therefore there are certain types of options contracts that are defined based on the time frame you consider investing in options.
- Regular Options: The expiration cycle for these options is standard. Depending on your preferences and strategy, you can select from at least four different expiration months.
- Weekly Options: tAs the name suggests, it has got an expiration time by the end of the week. Some investors call it weeklies as well.
- Quarterly Options: These are also referred to as quarterlies. Any expiration cycle between the next four quarters plus the final quarter of the following year is available to the investor.
- Long-Term Expiration Anticipation Securities: Just like its name, these options can be held for a long duration any time between one to three years.
In case someone is interested in the most popular form of options trading which is put and call options. Then here is the link for the article: What is Call and Put in Stock Market with Example?