Options are financial instruments
which offer the holder the right not obligation to buy or sell other financial instrument at a specific price on or before a specified date. The other financial instrument can be virtually anything like stock
, currency pair, precious metals
, agricultural or energy commodities,
funds, treasuries, indexes
, etc. The specific price at which the buy or sell should happen is called the strike price and the date on or which the execution should happen is the expiration date.
There are mainly two kinds of option contracts call and put. A call option is the right to buy the underlying financial instrument at a specified price and a put option is the right to sell something at a specified price.
According to how the trades are exercised, options can be divided into many interesting classes as European options which are executed only on expiration date.
American options which can be executed on or before expiration date.
Asian options which have payoff determined according to average price of underlying instrument over a time period.
Bermudan options which can be executed on only specified date on or before expiration date.
Binary or All-Or-Nothing options which demand some prerequisites to be met for successful payoff.
Barrier options which demand crossing a specified price barrier to exercise.
Vanilla options which involves simple easy-to-understand conditions or single trades.
Exotic options which involves two or more trades or are combination or options or includes some conditions or prerequisites.
Choosing the right broker for online options trading is very important because options are highly complicated financial instruments which many uses. More over a trader need to have advanced trading software platform for trading options.