DERIVATIVES • GUIDE

Options Trading Explained

Understand calls, puts, strike price, premium, expiry, intrinsic value and time value.

An option gives the buyer a right under its contract terms, unlike the obligation structure of futures.

Calls and puts

Calls generally benefit from an increase in the underlying; puts generally benefit from a decrease, subject to premium and other factors.

Premium

Option value depends on underlying price, strike, time, volatility and other variables.

Risk

Option buyers can lose the premium paid; writers can face much larger losses depending on the position.

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