What is options trading?

This post was originally published by Deriv on 26 May 2022

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Are you interested in expanding your portfolio with options trading but not sure where to start? Let us guide you through the basics of options trading and how it works!

What are options?

Options are timed contracts that give a trader the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specific time frame. 

This means that at any time during your contract's timespan, you can buy or sell the asset at that price, no matter the actual market price. If you go through with the transaction, it is called exercising the option. 

Essentially, options trading is all about predicting future market movements — if you predict the market will rise, set a lower price to buy your asset; if you think the market will fall, set a higher price to sell the asset. If the market moves according to your prediction and you exercise the option, you'll gain a profit. 

However, options trading on Deriv doesn't involve an exchange of assets. When you trade options on Deriv, you only predict the market movements, and you'll earn a payout if the market moves in your favour. 

What is options trading on Deriv?

Deriv offers a variety of options that you can trade on where you don't need to own the underlying asset:

• Digital options - you predict the outcome from two possible results and earn a fixed payout if your prediction is correct.
• Lookbacks - your payout is determined by the highest or lowest price point during your contract's duration.
• Call/put spreads - you earn up to a predetermined payout depending on the market price when your contract expires.

You can trade digital options on forex, commodities, stock indices, and our synthetic indices, which are available 24/7, including weekends and public holidays. Meanwhile, lookbacks and call/put spreads are available exclusively on synthetic indices. 

Deriv offers multiple platforms to trade options — Deriv Trader and SmartTrader are powerful, user-friendly trading platforms. In contrast, Deriv Bot offers the tools you need to build your own trading bot, even if you have no coding experience. 

On these platforms, you can customise the parameters of your trade, such as trade conditions, your preferred stake or payout amount, or even the contract's start time if you don't want your trade to start immediately. 

Benefits of options trading on Deriv

• Limited risk

When you trade options on Deriv, huge price fluctuations won't affect any potential losses from your trades. In fact, your losses will only be limited to your stake. 

• Low capital requirement

Options trading allows you to enter the market with minimal capital. On Deriv, the minimum deposit amount to start trading is 5 USD, and the minimum capital to open an options trade is less than 1 USD. 

• Flexibility

Options trading gives you flexibility as you benefit from both rising and falling prices, as opposed to owning the underlying asset and incurring a loss if prices fall. Plus, on Deriv, you get to take advantage of price movements on various financial markets. 

Start your options trading journey on Deriv risk-free with a demo account pre-loaded with virtual money. For further reading, here are the differences between CFD trading and options trading [or check out the most common types of technical indicators you can use to analyse markets and predict future movements].