What is Online Options Trading?

Online options trading refer to sell or buy a stock at a pre-determined price. It is basically an agreement between the two persons as of to sell or buy the share or the stock at the previously determined price but he is not entitled to hold the obligation in the fixed period of time.

What is an option contract?

While purchasing the options, the following terms are signed and pre-determined. So there are the terms that concern the option contract.

• Premium – The premium is the amount that the option buyer pays the option seller for the risk that is associated with the obligation. It depends on the strike price of the underlying asset as well as the expiration of the option.
• Expiration date – All the online options trading platforms have a pre-determined date of expiration. The options become worthless after the period of expiration.
• Option Class – The trade options have two classes namely the Call options and the Put options. The call options are which confers the buyer the right to buy the underlying stock in the pre-determined price. The put options allow the buyer to sell the underlying stock in the pre-determined price.
• Strike price – The strike price is the price of the underlying stock when the option is to be exercised.
• Option Style – There are two main styles of options experienced, the American style and the European style. The American style option can be exercised any time before the option expires while the European ones can be exercised only on the expiration date.
• Underlying asset – The underlying asset is nothing but the underlying stock on which the option can be exercised.
• Contract multiplier – The contract multiplier states the number of stocks that are to be delivered when the option is exercised.

So while buying an option makes sure that you are aware of all the above terms.

What is moneyness in option trading?

Moneyness is an important concept that is to be understood in online options trading. It describes the relationship between the strike price of the underlying asset and the market price of the asset. There are three states of moneyness. They are,

• In The Money or ITM is where the strike price is below the market price in the case of call option and the strike price is above the market price in case of the put option. Generally in the Money Options is more expensive.
• Out of The Money or OTM is where the strike price is above the market price in case of put option and the strike price is below the market price in case of put option. They have the likelihood of expiring worthless.
• At the money or ATM is where the market price and the strike price are the same. Bit this scenario is not likely to occur in most cases.

Liquidity in options:

Liquidity means the flow of assets from one investor to another. Well options need be so liquid as stock because they are not going to be stuck with you forever because they are going to expire in one way or the other. However the options that are not liquid tend to have a higher extrinsic value and this value have to be taken into account by the option buyers.

Steps to start online option trading:

Having known the basics of online options trading, we can now see the steps to start online option trading. As to all online trading practices; you must first have an account to start trading practices, either a checking account where you have to pay the entire amount or the margin account where you can borrow money from your broker for your trading practices.Then you will have to choose an online brokerage firm that may provide access to the market place. There are a number of online brokerage firms from which you can choose one depending on your requirement. Here you can place an order to meet your needs and your order will be executed in minutes or even seconds. Placing orders is a little different in options trading. Here there are two persons involved, the option seller or the write and the option buyer or the holder and the orders are executed as transactions between the seller and the buyer which may be an opening transaction or a closing transaction.  The orders are similar to stock trading such as the limit orders, stop orders, all or none orders etc.

Advantages of online option trading:

• Online options trading are done with a smaller capital and hence bigger gains are made with smaller capital.
• Online brokerages are comparatively cheaper. Less commission is always an advantage.
• Online option trading involves fewer risks with smaller loss but probabilities for bigger gains.