Options trading is one of the instruments of investing that gives an investor a choice when it comes to making maximum profits with minimum risk.
They can be used for a variety of reasons depending on your trading goals and styles, it may be a better trading choice than owing a stock.
An option is defined as a contract that gives the buyer the right to buy or sell an asset at a specific price on or before a certain date.
Option is one of the most diversified trading instruments available and can be traded with various financial instruments like stocks, stock indexes, currencies, futures, exchange traded fund, commodities and bonds.
It is a derivative as its value is derived from something else and in the case of an index option, its value is based on the index.
It is a security and constitutes a binding contract with strictly defined terms and properties and is a valid trading instrument, whereby the holder has the right, but no obligation to buy or sell the stock or financial instrument.
The buyer will pay some price to get this right called premium and the seller will have to buy or sell the underlying stock, if the owner of option decides to exercise their right.
An option allows you to sell the stock at agreed price called strike price, before agreed date called the expiry date.
The person who is selling you the put option carries the obligation to take the delivery from you of the stock, if you decide to exercise your right.
When you trade with stock options is more than simple stock is the leverage involved as options enable you to control the shares of a specific stock without tying a large amount of capital in your trading account.
The amount of capital that you are paying is a comparatively small amount comparing to the cost of buying the same amount of stocks.
It gives one the ability to invest a smaller amount of capital and control the stock and give the option trader the flexibility.
One can make money based on a relatively small movement in the stock.
The trader who wrote the covered calls may be forced to sell his stock when the options is exercised so use this only if you are willing to depart with the stock that you own.
There are various options strategies that give the options trader the ability to make money from all market directions with limited risk exposure and potentially unlimited profit.
One can buy call options when the market is bullish, buying put options when the market is bearish and entering into various credit spread strategies to earn profit when the market is range bound.
Stock options can be used as an instrument to hedge against various risk exposure of a stock holder and as insurance to protect your stock portfolio from any adverse move in the market.
Unlike stock where you can hold on to it for many years or even passes on to your children, all options have an expiration date and there is nothing you can do to stop the options from expiring.
The rate of time value increases over time when the options get closer to the expiration dates so be sure to watch over your open options position and not to let it expired worthless.
If you hold onto a trade and are out of money at expiration date, then you may lose that what you invested in the options.
Leverage works both ways as it can help you earn profit in shorter time frame and can break your account in half that time just as quickly.
The risks of leverage is present when one is involved with calls or puts or entering into any unlimited risk option strategies.
Options trading is a risky venture and it has substantial risk and reward involved and you need to trust your instincts and do what you feel is the best for you so that you achieve your financial goals without any losses.
They can be used for a variety of reasons depending on your trading goals and styles, it may be a better trading choice than owing a stock.
An option is defined as a contract that gives the buyer the right to buy or sell an asset at a specific price on or before a certain date.
Option is one of the most diversified trading instruments available and can be traded with various financial instruments like stocks, stock indexes, currencies, futures, exchange traded fund, commodities and bonds.
It is a derivative as its value is derived from something else and in the case of an index option, its value is based on the index.
It is a security and constitutes a binding contract with strictly defined terms and properties and is a valid trading instrument, whereby the holder has the right, but no obligation to buy or sell the stock or financial instrument.
The buyer will pay some price to get this right called premium and the seller will have to buy or sell the underlying stock, if the owner of option decides to exercise their right.
- Option type as CALL or PUTStrike priceOption type as call or put Expiry date An option that gives you the RIGHT to BUY the underlying
stock/instrument at agreed price called strike price, before agreed
date called expiry date.
The person who is selling you the call option carries the obligation to deliver you the instrument, if
you decide to exercise your right.An option allows you to sell the stock at agreed price called strike price, before agreed date called the expiry date.
The person who is selling you the put option carries the obligation to take the delivery from you of the stock, if you decide to exercise your right.
When you trade with stock options is more than simple stock is the leverage involved as options enable you to control the shares of a specific stock without tying a large amount of capital in your trading account.
The amount of capital that you are paying is a comparatively small amount comparing to the cost of buying the same amount of stocks.
It gives one the ability to invest a smaller amount of capital and control the stock and give the option trader the flexibility.
One can make money based on a relatively small movement in the stock.
The trader who wrote the covered calls may be forced to sell his stock when the options is exercised so use this only if you are willing to depart with the stock that you own.
There are various options strategies that give the options trader the ability to make money from all market directions with limited risk exposure and potentially unlimited profit.
One can buy call options when the market is bullish, buying put options when the market is bearish and entering into various credit spread strategies to earn profit when the market is range bound.
Stock options can be used as an instrument to hedge against various risk exposure of a stock holder and as insurance to protect your stock portfolio from any adverse move in the market.
Unlike stock where you can hold on to it for many years or even passes on to your children, all options have an expiration date and there is nothing you can do to stop the options from expiring.
The rate of time value increases over time when the options get closer to the expiration dates so be sure to watch over your open options position and not to let it expired worthless.
If you hold onto a trade and are out of money at expiration date, then you may lose that what you invested in the options.
Leverage works both ways as it can help you earn profit in shorter time frame and can break your account in half that time just as quickly.
The risks of leverage is present when one is involved with calls or puts or entering into any unlimited risk option strategies.
Options trading is a risky venture and it has substantial risk and reward involved and you need to trust your instincts and do what you feel is the best for you so that you achieve your financial goals without any losses.
No comments:
Post a Comment