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This is a two-part series on how to trade options. In continuation from the last post where the definition of terms and reasons of trading options were laid out, this post will now show you the different types of options.

Options Trading Types

Options can be classified to 2 types: Call option and Put option. A call option entitles the holder of the option the right but not the obligation to buy the stock at an agreed date for an agreed price. A put option, on the other hand, entitles the holder of the option the right but not the obligation to sell the stock at an agreed date for an agreed price. The holder in this case is the buyer of the options contract. Therefore, how to trade options of each type would be as follows:

Call Option: Buy – means that you are wanting to buy the stock at a specified date for a strike price

Call Option: Sell – means that you are wanting to sell the stock you own at a specified date for a strike price

Put Option: Buy – means that you are wanting to sell the stock you own at a specified date for a strike price

Put Option: Sell - means that you are wanting to buy the stock at a specified date for a strike price

When you buy an option, you have to pay a premium to the seller of the option. Regardless of whether you are able to exercise the option (to buy or sell the stock), the premium is held by the seller of the option. This premium amount is determined by the market price, and has some mathematical formula used to calculate its value. The formula is not that simple, but there are key factors which contribute to the pricing of the options premium. This is not something for beginners to look at on how to trade options. I generally don’t look so much into the pricing model, as it can be complicated, but it pays to know the concepts. If you would like more information about the option pricing model and how to trade options by looking at these figures, it is explained better with Planet Wealth’s education program.

For now, you would have hopefully learned how to trade options in terms of the 2 types of options. Watch out for part 2 for the next installment of how to trade options.