| Quote: | | | Originally Posted by simpleforex | | | | |
| An option is a right, but not an obligation, to buy or sell an underlying asset at an agreed price (strike) within a pre-determined timeframe.
You could buy or sell this right even if you do not have possession of the underlying asset. Buying an option does not carry any risk as you have no obligation to deliver but you maintain the right to exercise anytime before expiration (American model) or you can only exercise on expiration (European model)
You could also sell this right in which case you write the option (as in underwriting) and you carry an unlimited risk then. Writing is a very profitable exercise provided one is well versed in the underlying asset and the means to cover and mitigate the risk.
There are exchange traded options and OTC options and recently we started seeing digital options. Digital options are common nowadays because it is much easier these days with a computer to be able to accurately work out the value of an option. Options are normally valued using the Black Scholes model.
There are many options combinations that can be used for a variety of strategies and situations..conversions, straddles, strangles..butterflies..condors...but all of these are just variations of two basic spreads...the bull spread and the bear spread and it is just how one combine or stack up these two spreads.
The use of options is only limited by your very own creativity and is very profitable for those willing to take the effort to understand the dynamics of it. | |
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Thanks for the short and sweet advice!