Types of Options Orders
Before we move on to different kinds of options, it is important that you understand the example covered in the last chapter. If you are having doubts, feel free to review it, or write in to our team for further explanation.
There are many different types of options orders out there in the market. Here are just some of them:
– Over-the-Counter, or OTC
For simplicity, we will cover the more commonly traded types that is essential to your knowledge as a new options trader.
1. American – Do not be confused by the naming. American option is simply a name to describe an option that can be exercised at anytime from the purchase date of the contract up until its date of maturity. The previous examples that we have used are examples of American options where you are allowed to cash in immediately if you turn a profit before the expiration date of the contract.
2. European – Contrary to American options, European contracts cannot be exercised before the maturity date. This means that it can only be exercised at the end of its life. This is also one of the reasons why European options are traded at a discount to American options. There are fewer opportunities available for the trader to exercise contract for profits.
3. Exchange-Traded options – This type of contract is favored by new traders. They are fairly straightforward and easy to understand. The terms of each option are standardized by the exchange and the underlying asset or expiration date is known well in advance.
American vs European
One is no better than the other, but a vast majority of traders opt for American options due to the flexibility allowed. Another difference between the two is the way settlement price is determined. In American options, surprises are few and far between. For example, the price of calls does not tend to vary much in the last few minutes of trading, whereas in European options trading, this is completely the opposite. The prices of calls can often gap up or gap down from previous night’s close. This often turns holding options overnight into somewhat of a gamble. Of course, if you specialize in swing trading, or holding options over a number of days or weeks, this can be very profitable to you.
How To Trade Options
Why Trade Options?
Calls and Puts
How Options Work
Valuation of Options
Choosing The Best Options Broker
Leverage in Trading Options
Mistakes Options Traders Make
Types of Options Orders