Part 3 Institutional Trading

Option Styles and Formats

Options come in various forms to suit different strategies:

Vanilla Options: Standard call and put options traded on exchanges.

Exotic Options: Options with complex structures, including barrier, digital, and Asian options.

LEAPS: Long-term options with expiration dates up to three years.

Participants in Option Trading

Option markets attract a range of participants:

Hedgers: Protect existing positions from adverse price movements.

Speculators: Seek to profit from directional price changes or volatility.

Arbitrageurs: Exploit price differences between markets or instruments.

Market Makers: Provide liquidity by quoting buy and sell prices for options.

Advantages of Option Trading

Option trading offers several benefits over traditional trading:

Leverage: Control large positions with smaller capital.

Flexibility: Wide range of strategies for bullish, bearish, and neutral markets.

Risk Management: Ability to hedge stock portfolios and limit losses.

Income Generation: Selling options (writing) generates premium income.

Speculation Opportunities: Capitalize on volatility without owning the underlying asset.