Options trading represents a high-risk derivative instrument. Before engaging in trades, thoroughly review the Options Risk Disclosure.
1. What Are Options?
An Option is a financial contract granting the buyer the right (but not obligation) to buy (Call) or sell (Put) an underlying asset at a predetermined price (strike price) by a specified date (expiration). Key characteristics:
- Derived from futures markets
- Buyer pays a premium for the right
- Seller assumes obligation if exercised
2. Types of Options
By Rights Structure
| Type | Description |
|-------|-------------|
| Call Option | Right to buy underlying asset |
| Put Option | Right to sell underlying asset |
By Exercise Timing
- American Options: Exercisable anytime before expiration
- European Options: Exercisable only at expiration
👉 Most equity options are American; index options are typically European.
By Underlying Asset
- Equity Options (e.g., stocks)
- Index Options (e.g., S&P 500)
- Commodity/FX/Interest Rate Options
3. Key Terminology
- Strike Price: Fixed purchase/sale price
- Expiration Date: Last exercise date
- Open Interest: Active unsettled contracts
- Contract Size: Usually 100 shares per contract
- Settlement: Physical (stocks) vs. Cash (indices)
4. FAQs
Trading Mechanics
Q1: What’s the minimum trading unit for US options?
A: 1 contract (typically 100 shares).
Q2: Can I trade options pre/post-market?
A: No—options trade 9:30 AM–4:00 PM ET.
Exercise & Expiry
Q3: What happens to in-the-money options at expiry?
A: Auto-exercised if ≥$0.01 ITM; otherwise, they expire worthless.
Q4: Can I close positions before expiry?
A: Yes—trade anytime during market hours.
Risk Management
Q5: What if my account lacks margin for exercise?
A: Broker may liquidate positions or let options expire.
Special Cases
Q6: Are adjusted options (e.g., post-stock split) supported?
A: Yes—marked as "non-standard" in chains.
5. Pro Tips
- Monitor open interest for liquidity clues
- Weekly vs. monthly index options differ in settlement timing
- Early exercise risks include unexpected corporate actions
🚀 Ready to explore options strategies? Start trading wisely today!
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