The Complete Guide to Option Strategies: Advanced and Basic Strategies on Stocks, ETFs, Indexes, and Stock Indexes

CHAPTER 2

Option Fundamentals

Before you begin to trade, you should understand how options work. Once you have mastered the fundamentals, you can begin to trade with confidence. This chapter covers opening and closing an option position; the fundamentals of option buying versus selling; and an introduction to margin, option spreads, the bid/ask spread, and option chain.

OVERVIEW

Some option strategies are best in bull markets, some are best in bear markets, and others are best in sideways markets. Many novice option traders may be attracted to buying options because they are familiar with buying stocks (or other assets such as a home), and they are attracted to the possibility of large and unlimited profits. Buying calls can be a good place to start to learn how to trade options. You should understand the fundamentals of opening and closing an option position, the fundamentals of option buying versus selling, and other basics. We will progress in later chapters to option pricing and strategies.

OPENING AND CLOSING POSITIONS

When it comes to options, the terms buy and sell can be confusing at first. You can establish (open) a position by buying an option; you can subsequently close (offset) it by selling it in the marketplace. You can establish (open) a position by selling an option; you can subsequently close (offset) it by buying it in the marketplace. Throughout this book, the terms buy and sell refer to opening/establishing positions unless otherwise indicated.

At first, ...