Equity options definition

Equity options are a form of derivative used exclusively to trade shares as the underlying asset.

In essence, equity options work in an extremely similar way to other options*, such as forex or commodities. They offer the trader the right, but not the obligation, to purchase (or sell) a set amount of shares at a certain level (referred to as the ‘strike price’) before it expires. To buy an option, traders will pay a premium.

Equity option example

Let’s say that Alphabet shares are trading at $730. You buy an option to purchase shares of Alphabet before the end of the week at $800, and pay a premium of $25 to do so. If Alphabet’s share value exceeds $825, then the trade is in profit, and you are free to execute the trade.

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Equity options are just one of many derivatives that traders can use to trade shares. Find out more in our shares trading section.

*Options are only available via spread betting accounts and professional CFD accounts.

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