CFD trading is a vast instrument that awaits several traders to take advantage of its promising benefits despite the known risk. One among these advantages is its ability to be used for options speculation. In case you are new to the trade, options speculation actually refers to a moment when a trader places his position in the market with an expectation that they could earn profit once market rates move up or down. In order to gain more profit, most options speculators use CFDs and other derivatives because of their huge leverage. In our article, we look forward to sharing our thoughts that will help you understand terms such as Options,Obligations and Rights.
Defining Options
Options are trading contracts that are designed to provide holders an opportunity to either purchase or dispose an underlying asset at a particular rate and particular time. This type of instrument falls under derivatives. Because options and CFDs fall under the same category, it is no longer puzzling to realize that stocks, bonds, currency, interest rates, market indices, exchange-traded funds (ETFs) or futures contracts and CFDs can be used to determine an options value in the market.
Types of options
- The Call
The call which is a shortened term for Call options are contracts where the trader and the provider decides to trade for a security at an agreed rate. In this case, the trader is given the right to buy an agreed quantity of a particular commodity or financial instrument from the options provider. The contract itself has a preset expiration date and a strike rate.
- The Put
This option is intended for a buyer who wishes to avail the said instrument via selling and short selling. This type of option is tradable to other instruments such as stocks, currencies, bonds, commodities, futures, and indexes.
The Obligation vs Rights in Trading Options
Obligation
The legal definition of an obligation is the necessity to do a duty or task and to continuously create a right to demand an action to individuals where the performance is intended. By Applying this term to call option, we can say that when an options premium expires, which happens when the asset falls below the strike price, the trader will no longer have an obligation to buy the stock for more than the market price value of shares.
Rights
The dictionary defines rights as a moral or legal entitlement to have or obtain something or to act in a certain way. Thus, we can note that a call option buyer is therefore allowed to perform his right to buy a stock at the strike price.
Conclusion:
Having the explanations laid down on the table makes us realize that people who are into CFD Trading must know that call options allow its holder to exercise his right to purchase an underlying asset at a pre-specified rate. In times when the said contract expires or before its expiry, the options holder can obligate a seller to sell the said asset at the pre-specified rate. However if the rates fail to hike up the strike , the options holder can simply let go of his rights and just lose the premium amount used for the option.