The underlying asset, exercise price, expiration date, contract size, option type, exercise style, premium, and trading method.
Although it may seem complex, the factors to consider when choosing an option aren’t much different from what we take into account when shopping.
For instance, when buying clothing, you’d consider the style, size, and price before making a purchase. Similarly, with options, you can select the underlying asset, set the exercise price and expiration date, pay the premium, and exercise your right to buy or sell to achieve the final payoff.
- Underlying asset: This is the financial product you want to buy or sell, such as stocks or futures. It’s like deciding what type of clothing you want when you go to a store.
- Exercise price: You need to establish your budget and consider the price range you can afford. In options, the exercise price is like deciding at what price you want to buy or sell the underlying asset.
- Expiration date: The expiration date is the final deadline for exercising the option contract. It’s like deciding when you want to buy clothing, taking into account the time and occasion for which you need it.
- Contract size: Determine how many contracts you want to buy, just like deciding how many pieces of clothing you want to purchase.
- Option type: In a store, you choose the style of clothing you want, whether it’s long-sleeved or short-sleeved, a dress or pants. Similarly, with options, you need to select the appropriate option type, such as a call option or a put option.
- Exercise style: Decide whether to pay immediately and buy the clothing or choose to pre-order and pay for it later. In options, exercise style refers to whether you decide to exercise the option immediately or before the expiration date.
- Premium: Just as you need to pay a certain amount to buy clothing in a store, you need to pay the premium to buy the option contract. This fee is the cost of buying the option and the source of the seller’s profit.
- Trading method: Options trading can be conducted on an exchange or over the counter, just like buying ready-made clothing or seeking private custom clothing. In the crypto market, options are typically traded on an exchange, such as Coincall.
The underlying asset, exercise price, expiration date, contract size, option type, exercise style, premium, and trading method.
It may sound complicated, but the elements to consider when choosing an option are not much different from those we consider when shopping.
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