Options are financial instruments giving the holder the right to buy or sell an underlying asset at a set price, known as the strike price, within a determined time period – but the holder is not obliged to buy/sell the asset. The underlying asset can be stocks, bonds, commodities, currencies or other derivatives.

There are two types of options, call options and put options.

1. Call options: A call option gives the holder of the option the right to buy the underlying asset. The holder would use a call option if they expect the price of the underlying asset to rise before the expiration date, so they can profit from the difference between the strike price and the market price.
2. Put options: A put option gives the holder of the option the right to sell the underlying asset. This is used if the holder think the price will go down before the expiration date, so they can make a profit by selling the asset at the higher strike price and buying it back at the lower market price.

There are a number of advantages to trading in options, such as:

1. Flexibility: There are many different strategies that can use options to profit from varying market conditions including bull and bear markets.
2. Leverage: Potential gains can be magnified using leverage to control a larger position in the underlying asset with a small investment. However this also means losses will be magnified as well.
3. Risk Management: Traders can use options to hedge against potential losses in a portfolio, for example by taking out put options on a stock they own to protect against its value declining.

Like many financial instruments, trading options involves risk and investors you make sure they understand the options market, as well as the details of the underlying asset. Options prices are influenced by many factors including the price of the underlying asset, time to expiration, volatility, interest rates, and market conditions.

GET STARTED

100% stocks, 0% comission
Get exactly what you're paying for with comission-free stock investing.

Disclosure: Your capital is at risk. Other fees apply. For more information, visit etoro.com/trading/fees