The open interest in an option refers to all contracts that are open and haven’t been settled. A call option gives the buyer the right to purchase shares at a certain price, and it gives the seller the obligation to buy at a certain price. A put option gives the seller the right to sell shares at a certain price, and it gives the seller the obligation to sell at a certain price. Due to high demand from retail investors, most all brokerages allow option trading in cash and margin accounts.
There are a few brokerages out there that still limit your ability to trade different kinds of option strategies.
If you are short a put option, you will have shares put to you, and money will be debited out of your account. Stock and option combinations are great opportuniteis for investors as they offer ways to get better prices on stocks they really want to own. If the buyer of the option does not use (exercise) that option before the date, then it will be rendered null and void. To solve this, we have a centralized options clearing organization to help match buyers and sellers. The only time an option is created is when two parties come to an agreement on the risk pricing and they transact with one another. This is a bad idea because it removes your ability to manage risk through options adjustments. This is where traders will use the leverage and risk structure of options to make a bet on the movement in a stock price. If you are going to daytrade options, you must make sure that the options you are trading are very liquid so you can enter and exit very easily.
If you are trading in size, you become much more sensitive to movement in the implied volatility of the option. There are advantages to options over stock because you can dictate exactly how much you are willing to risk on a bet.
If a trader is expecting less movement than what the market is pricing in, it’s often called income trading. The premium received in the stock helps to reduce the cost basis of the position, and removes some of the overall risk in the position. The investor pays a premium to remove downside risk underneath the strike price of the option.
Puts and calls explained|
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