#### Introduction: What are options?

Options, also known as financial derivatives, are contracts that give the buyer the right but not the obligation to buy or sell an asset at a specified price on or before a specific date. The buyer of options is called an option writer and the seller is called an option holder. The buyer of an option is said to have “bought” the right to buy. The seller of an option is said to have “sold” the right to sell. There are two types of options: call and put options. A put option gives the holder the right to sell an asset at a specified price. If the underlying security is above the strike price at expiration, then the put option becomes worthless. If the underlying security is below the strike price at expiration, then it would have time value. The buyer of a call option has the right to buy the asset at a specified price. If the underlying security is above the strike price at expiration, then it would have time value. The seller of a call option has the right to sell an asset at a specified price.

**Options Terminologies:**

**Hedging:** In a hedging transaction, investors use the options to protect themselves from a rise or fall in the market and/or their investments. Strategies: The strategies for using options vary from investor to investor. Some examples are:

**Expiration:** An option expires at the end of a certain period of time, usually one month, three months, six months, or one year. No-strike: A no-strike option is one that does not have any time limit attached to it. For example, a call option with a five-year expiration will be called a no-strike option.

**Call options:** A call option gives the holder the right, but not the obligation, to buy a stock at a specified price (the strike price) for a fixed period of time (the expiration date).

**Put options:** A put option gives the holder the right, but not the obligation, to sell a stock at a specified price (the strike price) for a fixed period of time (the expiration date).

For example, an option whose strike price is $30, and has a 30-day expiration, is described as being “in-the-money”, meaning that the option is worth more than its intrinsic value (i.e., the stock price). An option’s value is determined based on the strike price, the expiration date, and the stock price. The price of an option is the difference between the intrinsic value (i.e., the amount by which the stock price exceeds the strike price) and the premium (i.e., the amount of money paid to acquire that option).

#### Strategies for Trading:

There are a number of different strategies that can be used to trade in the options market. The most common strategies are trend following and the trend line break. A trend-following strategy is a buy signal when prices are rising while a trend line break is a sell signal when prices are falling. A trend line break occurs when a price is broken on an upward trend. For example, if an option’s current price is $100 and the underlying security moves up to $110, this would be a trend following signal. This will be considered a buy signal. There are a number of different trading strategies that can be used in the options market. The most common is to buy an option when it is deep in the money (ITM) and sell it when it is out of the money (OTM). Trend following strategies are not common in the stock market, but they can be used in options trading. The goal of a trend-following strategy is to profit from a consistent trend. A trend-following strategy is based on the concept that prices will continue moving up or down until they reverse direction. To be considered a trend following signal, the trend must be consistent over time. This means that there should be a pattern of increasing or decreasing prices over time. If a stock is making a concerted effort to reverse the trend, there will be more than one gap in the direction of movement or a series of gaps in succession. If a stock fails to make any progress over time, this is not considered a trend.

In trend-following, the trend is not necessarily a bullish or bearish one. A trend may be a “weak” one that has not been confirmed by the market, or it can be an “unconfirmed” one that has had no definitive ending or reversal. Trend-following is a strategy that involves buying and selling securities whose prices are moving in the same direction as the overall trend. The price of the security being used to track the trend is called the “base” security.

**The Greeks in options trading.**

In options trading, Greeks are the sensitivities of an option’s price to changes in certain variables. There are six Greeks: delta, gamma, theta, vega, rho, and lambda. These variables can be used to help traders understand how their option positions will react to price changes in the underlying security, time decay, implied volatility levels, and interest rates.

Each Greek measures a different aspect of the option’s risk profile.**Delta** measures the change in option value as the underlying stock changes.**Gamma** measures the rate of change in option value as the price of the underlying stock changes.**Theta** measures the time decay in option value as months or years pass.**Vega **measures how much an option’s price will rise when implied volatility increases.**Rho **measures the distance of an option’s price from the underlying stock price.

The Greeks are used in option valuation to determine the value of an option. The value of an option is calculated by multiplying the present value of its cash flows by the time until expiration.

The Greeks have been used in finance since their introduction by John J. Murphy and George H. Spinner in “Options as a Strategic Investment” (1981).

In conclusion, there are a variety of strategies that can be used when trading options. Whichever strategy you choose, make sure you are comfortable with it and understand the risks involved. Also, be sure to consult with a financial advisor to make sure you are making the best decisions for your individual situation.