What is an Outright Option?

Investors frequently utilise outright options as a financial tool to reduce risk and possibly boost returns in the stock market. They are a desirable option for inexperienced and seasoned traders since they provide flexibility and variety compared to regular stock trading.

We will delve into the realm of outright options in this blog article and examine what they are, how they operate, and options spreads vs out rights. Making informed investment selections requires having a solid understanding of basic options, regardless of experience level or desire to diversify your holdings.

Outright option meaning

An outright option is a kind of options contract that grants the buyer the right, but not the responsibility, to purchase the underlying asset at a specific price (the striking price) on or before a given expiration date, in the case of a call option, or to sell it, in the case of a put option.

An outright option simply involves one options contract instead of a spread option, which involves two separate options contracts simultaneously. This indicates that the outright option can be traded or utilised as a hedging tool on its own.

How do outright options work?

Suppose you want to purchase a call option on ABC’s stock, which trades at $50 per share. For an additional $5 per share, you purchase a call option with a $60 strike price and a three-month expiration date. This entitles you to purchase 100 shares of ABC for $60 a share over the following three months. If ABC’s stock price increases to $70 per share, you can exercise your option to purchase the shares for $60, earning $5 for each share. You can, however, let the option expire and just lose the $5 per share premium if the stock price stays below $60.

Features of outright options

Here are some of the features of the outright options: –

1. Traded on an exchange

The general public can trade outright options on exchanges. Both institutional and ordinary investors use it.

2. Leverage

Leverage has an advantage for investors. Since option traders do not need to pay the entire contract value to take a position in the market, they can utilise a small amount of money to take a prominent position.

3. Underlying

These options can be purchased on several underlying, including stocks, agricultural commodities, precious metals, etc. Every simple option traded on a single underlying securities is specifically referred to as an outright option.

Types of outright options

There are two types of outright options: call options and put options. A call option gives the holder the right to buy an underlying asset at a predetermined price within a set timeframe. On the other hand, a put option gives the holder the right to sell an underlying asset at a predetermined price within a set timeframe.

Call and put options are further categorised into American-style and European-style. American-style outright options can be exercised at any time before the expiration date, while European-style outright options can only be exercised on the expiration date itself.

Why do investors use outright options?

Investors utilise outright options for various purposes, such as income generating, speculating, and hedging. By fixing a price for purchasing or selling an underlying asset, hedging uses outright options to reduce the risks involved in owning it.

Contrarily, speculation refers to the employment of outright options by investors to place speculative wagers on the direction of the price of an underlying asset. They may be able to make a sizable profit if their prediction comes true and the option is in the money.

Finally, writing or selling options is another way that outright options can bring in money for investors. Even if an option expires worthless, investors can profit by receiving premiums from buyers of options contracts.

How do you choose the right brokerage for outright options?

When trading outright options, selecting the appropriate brokerage is an important step. It has the potential to significantly affect both your trading experience and, eventually, your earnings. Selecting a brokerage might be difficult because so many are on the market. But, before choosing a broker, it is crucial to take the time to investigate and assess each one.

The fees brokerage charges are an essential consideration when choosing one. Every broker has a different charge schedule, and they can differ significantly. While some brokers take a portion of the deal’s value as their fee, others demand a flat price for each trade. Furthermore, certain brokers could charge extra for particular kinds of trading, including options. You must comprehend all their associated costs to ensure that a broker’s fees align with your trading strategy.

The trading platform offered by the broker is an additional consideration. Your trading experience can be significantly improved with an easy-to-use and intuitive trading platform. Ensure the platform has all the features and tools needed to carry out your trades efficiently. Furthermore, it is imperative to verify the stability and dependability of the platform to prevent any possible disruptions during market hours.

Another crucial factor to consider is the broker’s degree of client service. A broker who is always on hand to help you with any problems or inquiries is what you desire. While some brokers have set hours, others provide customer help around the clock. Examining the broker’s customer service record and reviews is also brilliant.

The Bottom Line

For investors wishing to control risk and diversify their investment portfolio, outright options are helpful. Investors can decide whether to use them in their investing strategies by thoroughly understanding how they operate and the available different types. Before engaging in outright options trading, it is crucial to carefully weigh the risks and potential benefits, just like with any other investment.  Therefore, speaking with a financial counsellor is always advisable before making any investing decisions.

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