Question 1

What are options?

Accepted Answer

Options are derivative financial instruments that grant investors the right, but not the obligation, to buy or sell an underlying asset, such as a stock, at a predetermined price and within a specific time frame.

Question 2

What are call options?

Accepted Answer

Call options grant the holder the right, but not the obligation, to purchase 100 shares of the underlying stock at a predetermined strike price.

Question 3

What are put options?

Accepted Answer

Put options give the holder the right, but not the obligation, to sell 100 shares of the underlying stock at a predetermined strike price.

Question 4

What is the premium in options trading?

Accepted Answer

In the context of options trading, the premium is the price a buyer pays to the seller for the rights granted by the options contract. The premium serves as the per-share cost for holding the contract and can be thought of as the price to purchase the option. When buying or selling an option before expiration, the premium is the price at which it trades in the market, similar to how stocks are traded.

Question 5

What options trading strategies are available in the BBAE app?

Accepted Answer

The BBAE app offers access to a selection of options trading strategies for customers who satisfy the necessary suitability requirements. These strategies are designed for various risk tolerances and market perspectives:

Within the app, you can access the following options trading strategies:

1. Buying a Call: If you believe the underlying stock's price will increase, consider purchasing a call option.
2. Buying a Put: If you expect the underlying stock's price to decrease, consider purchasing a put option.
3. Selling a Covered Call: By selling a call option while owning the underlying stock, you can generate extra income with the potential obligation to sell the stock if its price exceeds the strike price.
4. Selling a Covered Put: Sell a put option while shorting the underlying stock to potentially profit from the premium received if the stock's price stays above the strike price.
5. Selling a Cash-Covered Put: Sell a put option while holding sufficient cash in your account to purchase the underlying stock, with the goal of profiting from the premium received or possibly acquiring the stock at a lower price.
6. Vertical Debit/Credit Spreads & Calendar/Diagonal Spreads: Utilize a combination of options with varying strike prices and/or expiration dates to manage risk and potentially profit from diverse market conditions.
7. Equity Naked Put: Sell a put option without owning the underlying stock, aiming to profit from the premium received, while bearing the potential obligation to buy the stock if its price drops below the strike price.

Please note that BBAE does not currently support index option trading.

Question 6

What factors influence the premium in options contracts?

Accepted Answer

The premium is not arbitrary; it is influenced by several factors related to the value of the contract and the underlying security. These factors include:
1. The underlying stock's price
2. The volatility of the underlying stock
3. The time remaining until the contract's expiration

Question 7

Why is understanding the premium important in options trading?

Accepted Answer

By understanding the concept of the premium and the factors that influence its value, you can make more informed decisions when entering and exiting positions. The premium plays a crucial role in assessing the potential profitability of an options trade and should be considered carefully during the decision-making process. Being aware of the premium and its components can help you determine whether an options contract is fairly valued or overpriced, allowing you to make better-informed decisions on your trades and manage risks more effectively.

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