Options are derivatives that offer profit potential but at significant risk. Learn about types of options, the risks involved, and how effectively to use them in your portfolio.

Frequently Asked Questions

  • How do options work?

    An options contract gives its holder the right to buy (Call) or sell (Put) the underlying security at an agreed price and agreed time. You pay a premium for that right, and that impacts your profit. Bullish traders could opt for call options, whereas bearish traders would consider put options. You can also use a combination of options for advanced trading strategies. But trading options is risky and some strategies can lead to unlimited losses.

  • What is open interest in options?

    Open interest in options is the number of open options contracts held by market participants at the end of the trading day. High open interest may indicate continuation of a current price trend whereas low open interest could mean the current price trend losing steam. High open interest also is an indication of market activity for the option.

  • What is delta in options?

    Delta in options trading refers to how much an option price will change for any change in the price of the underlying security. A delta of 0.5 for an option would imply a 50 cent upward or downward movement in the option price for every dollar change in the price of the underlying security. All else equal, at expiry, delta for in-the money call and put options trend towards 1 and -1 respectively.

  • What is gamma in options?

    Gamma is a second-order Greek because it measures the rate of how another Greek, Delta, changes with the stock price, and not how the option price itself changes. Positive gamma, as seen in long calls and long puts, implies fast-paced gains or slower rate of losses. Negative gamma, found in written calls or puts, means accelerated losses or slower gains. 

  • When do options expire?

    All options contracts have an expiration date, after which they become worthless. Traditionally, index options expired on the 3rd Friday of the month. But now there are options with weekly expiration (Monday, Wednesday and Friday expiry), end of month expiration as well as quarterly expiration. Expiry dates affect the premium you pay. You exercise European options at expiry but American options can be exercised earlier.

  • What is theta in options?

    Theta measures how the value of an option decreases as it nears expiration. It is also called time decay. Theta is typically negative for call or put options you purchase and positive for puts and calls you sell. It is one of the many “Greeks” used by derivative traders to assess risk.

  • What are spreads in options?

    Spreads are options strategies that help minimize risk by buying or selling a combination of different options contracts on the same underlying security. Spreads can be classified in many ways — vertical (same expiry, different strike price), horizontal (same strike price, different expiry) or diagonal. They may also be categorized as credit or debit spreads. Some spreads get more colorful names such as Collar, Strangle, Butterfly Spread etc.

Key Terms

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