options trading definition

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What is options trading?

Options trading is the practice of buying or selling options contracts. These contracts are agreements that give the holder the choice to buy or sell a collection of underlying securities at a set price by a specific date. Investors can, but don't have to, own the underlying security to purchase or sell an option.

How are options trading and volatility related?

Options trading and volatility are intrinsically linked to each other in this way. On most U.S. exchanges, a stock option contract is the option to buy or sell 100 shares; that's why you must multiply the contract premium by 100 to get the total amount you’ll have to spend to buy the call.

Why do options always trade above their intrinsic value?

In real life, options almost always trade at some level above their intrinsic value, because the probability of an event occurring is never absolutely zero, even if it is highly unlikely. Options are a type of derivative security. An option is a derivative because its price is intrinsically linked to the price of something else.

What are the risks of options trading?

Options trading does come with a number of risks. Money for nothing: For the buyer of an option, the most obvious danger is that the underlying asset doesn't move in the desired direction, forcing them to let the contract expire. So, they paid the premium for nothing. Have this happen often enough, and it can add up.