Info 1: option trade definition
Info 2: how option trade works
Info 3: option trade vs derivatives
Info 4: example of option trade
Opening information:
Option trade breaks into two words option and trade, option means choice of choosing one item, and trade means buying and selling. option trade means choosing to buy and sell the Securities based on choice.
So now let’s have a look at what is options trade, how options trade works in the public market among all stock Investors and Corporate institutions, and what is the difference between option trade and derivatives, finally one brief example of an options trade.
Info 1: option trade definition
Otta is a slipper company that offers leather slippers for each of their company request company and they also have a great reputation among their consumers.
When comes Otta slipper industry, where they had more business-to-business customers than direct consumers in the world market.
Most of the outside Industry would smell that otta Industry quality leather makes the product highly competitive and at the same, it also creates huge demands every year consistently.
So one Pitolo organization agreed to buy the shoes for 45 dollars even if it’s only worth about 30 dollars now by paying an extra premium for their service to provide the slipper rate of 45 dollars in the next 6 years.
They had a deal to purchase the slipper leather at the pre-determined date and amount of 45 dollars after the 6 years. Once the slipper rate is very low the amount which is paid to the slipper is more than 30 dollars which is not repayable by the Otta institution.
If the price of the leather was very high, Pitolo had a great chance to purchase the slipper only for 45 dollars even if it was 100 dollars in the market, and at the same time, they were allowed to not purchase the product if its value decreased heavily.
Here the activities of buying or not purchasing the slipper leather as the choice of contract from the Otta institution with a paid premium in advance for the risk of the deal is named as an option trade.
So now let’s dive into how the option trade works in the public market among all public Investors.
Info 2: how option trade works
The option doesn’t represent any of the specific things or objects, instead, they are contract agreements that are constructed based on the choice to buy or sell one determined public security at a future time.
Therefore any of the people who are involved in the Securities using of the options contract to trade them at a pre-determined time frame are considered as option trade.
Suppose the stock and debt instruments are not used to choose a full contract to speculate the art of price fluctuations in the up and down market, which activities are not elaborate as option trades.
If any of the people pay the premium amount for trading the one security price falls up with the purchased price as the strike price which is said as the trade with option.
Because an option means nothing it’s a choice that is used in the agreement to buy and sell the stocks with a deal made on activities of speculation as an option trades.
If such a contract is used for any kind of public securities such as commodities, individual stocks, bonds, currencies, index funds, etc… They are illustrated as options trade.
For this reason, the option contract is an agreement of the deal, but it’s not Ownership like stock or bonds, therefore when any of these securities used such function of choice to purchase or not purchase, it became an option trade.
Most people’s confuse the option trade and derivatives, so let’s jump into the key difference in it anyway.
Info 3: option trade vs derivatives
The difference between option trade and derivatives is, that option trade refers to the activities that are influenced by the choice of full contract deal towards non derivative securities.
On the other side, derivatives are the one type of public Securities Investment but with driving a price from any other external sources.
To make you more clear about the option trade, let’s look into one brief example below.
Info 4: example of option trade
Say the company U had 125 million outstanding shares, among the 125 million shares 4 million shares were purchased through the futures securities.
Next, the 5 million shares show that such Ownership is purchased in activities of choice full contract and agreement.
Here the 4 million shares of futures contracts and 5 million of choice full contracts are derivatives, but that choice fully purchased contract activities demonstrate the option trade.