Options are interchangeable financial contracts that give the buyer the right to call or put a stock or commodity on someone based on the strike price and the underlier. Options contracts are are not assets like bonds that own debt or stocks that are ownership of equity in a company. they are more bets on a price being reached within a certain time period.
Options are created in the marketplace when they are written or sold to open and retired when they are bought to close. People can get confused on how they work so here is a break down on the option trading process.
An option trader can buy an option. This is called ‘buy to open’.
An option trader can sell an option they do not already own. This is called ‘sell to open’.
An option trader can buy back and option they created by buying it back to close their short position. This is called ‘buy to close”.
An option trader can sell and option they own and go back to cash. This is called ‘sell to close’.
Option contracts are fungible so the same person that you sold an option to is not the same person that you buy it back from.
Options are different than assets as they are contracts that are both created and retired. They have life spans and then expire. Unlike bonds and stocks, options are contract markets so there is always two sides to every option position, one trader is short and one trader is long creating a zero sum game. For each dollar lost someone on the other side of the trade makes a dollar in options as longs and shorts are equal.
Options are created when opened and retired when closed.
I have created the Options 101 eCourse for a shortcut to learning how to trade options.
