Wide variety of choices among different options types can eventually confuse any trader. How to make the right decision about the most suitable trading instrument? Don’t worry, the following guide is quite comprehensive and will definitely assist you in making the most proper decision.
First and foremost, familiarize yourself with the general description of an option: An option represents a contract enabling its holder with the right to purchase or sell an asset unit at a certain price and on a certain date. An option with the ability to purchase with a certain price is named Call. An option with the ability to sell is called Put. The standard goal is applicable to both types: to generate profit based on the difference between the selling and buying price. Options can be divided into different styles (aka “families”). The majority of styles belong to American and/or European style.
These two types of options have got a lot of similarities. However, their differences play the most important role. The right to exercise: American style of options enables its holder to perform the contract any time prior to the expiration of the option. European options can be executed only after reaching maturity. That is the main difference between those two types affecting prices. European options usually cost less than American ones due to a better flexibility. Assets types: Almost all stock and equity options belong to American style of options. Indexes usually belong to European options.
The key difference is that both European and American options represent the “traditional” types since they are physical contracts, while Classic Options represent Contracts-For-Difference (“CFDs”). Both of them belong to derivative trading instruments. However, in case of physical contracts a trader actually purchases and sells the assets, while CFD actually provides the ability to generate profit from the price movement, while the contract cannot be concluded to purchase the actual assets. Table below provides general comparison of classic and traditional options based on 3 general parameters:
Traditional Options: Min. 100 options. All options have fees and commissions by brokers. No refund for the contract cost even in the case of no contract execution
Classic Options: Min. 1 option. No fees and/or commissions in case of trading with IQ Option. Client receives his investment back via closing the position located at a break-even point prior to contract expiry.
As can be seen from the table above, Classic Options contain a number of key advantages comparing to European and American options. However, accessibility still remains their main advantage. While European and American options can be traded only at major stock exchanges, Classic Options are readily available for everyone who uses the IQ Option trading platform. Have you previously experienced trading European, American or Classic Options? Feel free to share your experience in the Comments section provided below.