Investing: Options Trading Cheat Sheet

Overview

Options trading allows investors to buy or sell assets at predetermined prices, providing flexibility for hedging, speculation, and strategic portfolio management.

Key Components of Options Trading

*1. Option Types*

• Call Option: Right to buy an asset at a set price before expiration.
• Put Option: Right to sell an asset at a set price before expiration.

*2. Key Terms*

• Strike Price: The agreed-upon price for buying or selling an asset.
• Premium: The cost of purchasing an option contract.
• Expiration Date: The deadline for exercising the option.
• Intrinsic Value: The profit potential if exercised immediately.

*3. Common Trading Strategies*

• Covered Call: Selling call options against owned stocks to generate income.
• Protective Put: Buying put options to hedge against stock declines.
• Straddle: Holding both call and put options to profit from volatility.
• Iron Condor: Using multiple options contracts to manage risk in sideways markets.

Risks & Considerations

• Leverage Risk: Small price changes can lead to significant losses.
• Time Decay: Options lose value as expiration approaches.
• Market Volatility: Unpredictable price swings impact option value.

Tools & Resources

• Options calculators for pricing models.
• Trading platforms with option contracts.
• Financial advisors specializing in derivatives trading.